Withdrawals on pretax savings will be counted as income and taxed
Any withdrawals you take from your pretax retirement accounts will be counted as ordinary income in the calendar year you take the withdrawal. That means you’ll have to pay taxes on that money. If you’re still working, any withdrawals will be added to your earned income and could push you into a higher tax bracket, depending on how much you withdraw and how close you are to the next income bracket. This is why having a withdrawal strategy is important.
Roth withdrawals are generally tax free
If you’ve made Roth contributions to an IRA or within your employer-sponsored retirement plan, contributions can be withdrawn at any age without taxes and penalties, but earnings withdrawn prior to age 59½ would generally be subject to ordinary income tax and a 10% tax penalty unless an exception applies. But once you’re 59½, you can withdraw both contributions and earnings free and clear as long as you’ve held a Roth account for at least five years.
Withdrawing too much too soon can undermine your savings
Remember, retirement accounts are built for long-term growth to help you save enough to last throughout retirement. Money you withdraw now loses the benefit of tax-advantaged growth potential, which can multiply your savings more and more the longer you save. A few thousand dollars taken out today could mean tens of thousands less later.
Before taking withdrawals, it’s best to consider your whole financial picture and create an income plan that includes all your potential sources of income, such as Social Security, pensions, your investments and savings, and your salary if you’re still working.
Some penalty-free withdrawals can be taken prior to 59½
Although most people can only avoid penalties on retirement account withdrawals by waiting until age 59½, there are some exceptions. Penalty-free withdrawals may be allowed if you’re permanently disabled, have certain medical expenses, want to make a first-time home purchase (IRA only), need money for qualified higher education expenses (IRA only), or meet the IRS definition of severe financial hardship (for some 401(k) plans). To learn more about these and other exceptions, look at the details on the IRS website.
For those turning 59½, here are some things to consider when creating a strategy for withdrawals from your retirement accounts.
Are you still working?
If you’re still working, you may want to leave your money invested to get the added growth potential until you really need the money. On the other hand, perhaps you want to cut back on work or take a dream job with less income. This could mean that tapping into some of those savings sooner rather than later is the right decision for you as long as you’ve accounted for your long-term needs.
When will you take Social Security benefits?
You’ll be eligible for Social Security when you turn 62, but if you start your benefits prior to your full retirement age (age 66-67 depending on your birth year), your benefits will be permanently reduced. If you delay Social Security until after your full retirement age, up to age 70, your benefits will go up 8% annually.1 Keeping these numbers in mind can help you decide how much to take from your savings in the meantime, should you need to.
Do you have Roth retirement money?
If you need money, you might consider withdrawing from Roth (after-tax) retirement money first. One advantage of withdrawing Roth savings before pretax savings is that you won’t owe any taxes on that money—including your contributions and any earnings—if you’ve reached age 59½ and it has been at least five years since your first Roth contribution. And since qualified distributions from Roth accounts don’t count toward your taxable income, they can’t push you into a higher tax bracket. With pretax accounts, if you withdraw your savings while you still have work income, you may be increasing your overall taxable income. That could mean higher taxes on your money compared to waiting to withdraw the money when you’re earning less and may be in a lower tax bracket.
On the flip side, hanging on to Roth savings allows you to continue getting tax-free growth on your investments, which is like free money. As you can see, it’s a balancing act that can get complicated and requires a holistic approach to your money.
What other income do you have?
If you have other sources of income, such as a pension, annuity or something else, consider when this money kicks in and how much it will be. In some cases you may need to draw on your retirement savings until that income starts. Or that income might allow you to delay taking withdrawals from your retirement accounts.
Keep in mind that you’ll be required to take money out of your pretax retirement accounts starting at age 73. These are called required minimum distributions, or RMDs. This will generally be considered taxable income, so RMDs should also be built into your income plan. For some people, converting their pretax accounts to Roth accounts in the years leading up to age 73 before RMDs begin might make sense. While you must pay the taxes when you make Roth conversions, after the conversions you’ll have (1) no RMDs on your Roth account and (2) no taxes on any earnings if you are at least 59½ and it has been at least five years since your first Roth contribution.
Having access to your retirement savings penalty free is a giant milestone after many years of saving. But again, just because you can doesn’t mean you should. Make sure you understand the impact any withdrawals would have on your long-term finances. Taking withdrawals too soon may force you to live on less later. The longer you can keep your money working for you, the better off you’re likely to be down the road. Creating a comprehensive income plan now will help you make wise decisions about when and how to take withdrawals from your retirement savings that preserve and enhance your long-term financial security.
For help with a plan that’s right for your needs and goals, contact your Corebridge financial professional. Reach out to us if you don’t have an assigned financial advisor.
This material is general in nature, was developed for educational use only, and is not intended to provide financial, legal, fiduciary, accounting or tax advice, nor is it intended to make any recommendations.
1Social Security Administration, Retirement Benefits, Publication No. 05-10035, April 2025, ssa.gov/pubs/EN-05-10035.pdf.
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