How to Calculate the Taxes on Your Withdrawals

by Michael Keenan ; Updated July 27, 2017

The federal government offers a variety of retirement plans with tax benefits to encourage retirement savings. Some of these plans, known as Roth plans, offer after-tax savings, which means your qualified distributions come out tax-free. However, many people have tax-deferred plans, which means the withdrawals count as taxable income in the year that you take money out. To better plan for your tax bill, you need to estimate the amount of money you will have to pay in additional taxes and, if you take a nonqualified distribution, the penalties you will owe.

Step 1

Determine whether your withdrawals are qualified distributions or not. For traditional 401k and traditional IRA plans, qualified distributions include any distribution taken after turning 59 1/2 years old. For Roth 401k plans and Roth IRAs, qualified distributions require you be 59 1/2 and that the account have been open for at least five tax years. Roth 401k and Roth IRA qualified distributions come out tax-free. Taxable early distributions from any account incur an additional 10 percent early withdrawal penalty.

Step 2

Estimate your total taxable income for the year, including your taxable withdrawals. Total taxable income includes both your taxable income such as wages or taxable interest, and any deductions you will claim on your income taxes. Do not include your nontaxable distributions, such as qualified Roth IRA and Roth 401k plan withdrawals.

Step 3

Find your marginal income tax bracket using the tables in IRS Publication 17 based on your filing status. These tables change annually to account for tax law changes and inflation. For example, if you filed as single in 2010 and had $90,000 in total taxable income, your marginal tax rate equals 28 percent.

Step 4

Multiply your taxable distribution by your marginal income tax rate to calculate your taxes you will pay on your retirement account withdrawals. In this example, if you withdrew $4,830, multiply $4,830 by 0.28 to get $1352.40 in income taxes.

Step 5

Multiply your retirement account withdrawal by 0.1 to find the early withdrawal tax penalty you will have to pay if you took a nonqualified distribution. In this example, if your distribution was nonqualified, multiply $4,830 by 0.1 to find you would owe an additional $483 in early withdrawal tax penalties.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."