The Short AnswerThe taxable part of a distribution from a pre-tax 401(k), IRA, pension or cash balance plan is generally treated as ordinary income. Retirement tax planning manages when and how that happens, using withdrawal sequencing, Roth conversions, and tax-advantaged buckets such as Roth accounts and properly designed life insurance, so the second bill is planned in advance.
Where Does Retirement Tax Planning Start?
With the pre-tax balance. The taxable part of every distribution from a 401(k), IRA, pension or cash balance plan is generally taxed as ordinary income, a bill this site calls the Second Bill. Retirement tax planning looks at when, and at what rate, that bill gets paid.
What Does A Large Pre-Tax Balance Cost In Retirement?
- Required minimum distributions that force taxable income every year
- Medicare IRMAA surcharges on premiums when income crosses set thresholds
- Up to 85% of Social Security becoming taxable
- Heirs inheriting the tax, generally required to empty inherited IRAs within 10 years
How Can You Lower Taxes In Retirement?
Sequencing withdrawals across taxable, pre-tax and Roth accounts. Partial Roth conversions in lower-income years. Adding Roth and other income sources taxed differently before retirement so the pre-tax pile does not have to carry everything. Your Tax Scorecard shows what your own pile costs to live on.
When Do Required Minimum Distributions Start?
Under the IRS final regulations, the applicable age is 73 for an employee born on or after January 1, 1951, but before January 1, 1959, and 75 for an employee born on or after January 1, 1960. The first RMD from an IRA is due April 1 of the year following the calendar year in which you reach the applicable age, and each later RMD is due by December 31.
The IRS says you may have to pay a 25% excise tax on the amount not distributed as required (10% if withdrawn within 2 years). The IRS also says you are not required to take withdrawals from Roth IRAs, or from designated Roth accounts in a 401(k) or 403(b) plan, while the account owner is alive.
How Do Roth Conversions Fit In?
A Roth conversion moves pre-tax money into a Roth account, and the part of the conversion included in income is taxed in the year it happens, which is why conversions are often looked at in lower-income years. The IRS says qualified distributions from a Roth account, including earnings, are excluded from gross income. For a designated Roth account, a qualified distribution must satisfy the five-year rule and be made after age 59½, death or disability. Separate Roth IRA rules apply to converted amounts.
IRS Publication 590-B adds that a separate 5-year period applies to each conversion and rollover, and that the 10% additional tax on early distributions can apply to the part of a conversion that was included in income, unless an exception applies.
How Do Social Security And Medicare Fit In?
IRS Publication 915 says generally up to 50% of your benefits will be taxable, and up to 85% can be taxable in some situations, including when one-half of your benefits plus all your other income is more than $44,000 on a joint return. Taxable withdrawals can add to that other income. Medicare says the Part B premium can be higher depending on your income, so a withdrawal or conversion in one year can touch both.
How Does California Tax Retirement Income?
The Franchise Tax Board says "The California treatment of pension and annuity income is generally the same as the federal treatment," and that California does not tax Social Security benefits. California's 2025 rate schedules reach 12.3%, with an additional 1% on taxable income over $1,000,000, so the size of a withdrawal in a given year can matter at the state level too.
What Happens When Heirs Inherit A Pre-Tax Balance?
For a designated beneficiary who is not an eligible designated beneficiary, the IRS lists the 10-year rule: empty the entire account by the end of the 10th year following the year of the account owner's death. A surviving spouse who is the sole beneficiary has more options than a non-spouse beneficiary. Beneficiaries of a traditional IRA include taxable distributions in gross income, so an inherited pre-tax balance brings its tax along.
What Happens If Money Comes Out Early?
The IRS says the amounts withdrawn from an IRA or retirement plan before age 59½ are called early distributions, and any taxable portion not rolled over may be subject to a 10% additional tax unless an exception applies. One exception covers an employee who separates from service during or after the year the employee reaches age 55. Timing a withdrawal around those ages is part of the plan.
What Is Useful To Bring To A First Call?
The first call is 30 minutes on Zoom. These items make it faster:
- Statements for every pre-tax, Roth and taxable account
- Your latest tax return and a rough retirement date
- Your Social Security statement, if you have one
- Any pension or cash balance plan statement
- The name of your CPA, who works alongside Tyler on the plan
What Does This Mean For Ventura County Plan Sponsors?
Business owners with a pension face the Second Bill at the plan level too. In the 2024 filings, at least 115 employers in Ventura County cities sponsored a small defined benefit or cash balance plan. Of those, 38 reported assets of at least 125% of their funding target, the actuary's measure of what the plan owes for benefits earned so far, and 3 were terminating.
When a plan ends with more than it needs and the surplus goes back to the business, federal law taxes that surplus at 50%, or at 20% when the statute's qualified replacement plan or benefit-increase requirements are met. Whether a given plan has surplus assets at all is an actuary's finding. Those counts are minimums, because Westlake Village is in Los Angeles County. Plan sponsors can meet on Zoom or in person around Ventura County. Go to tax strategy across Ventura County for the local picture, and run your own plan balance through the exit calculator.
Common Questions
At what age do required minimum distributions start?
Under SECURE 2.0, RMDs start at age 73 for people born from 1951 through 1958, and at 75 for people born in 1960 or later. The IRS regulations set the rule for people born in 1959, so confirm yours with your CPA.
Is a Roth conversion worth it for high earners?
Whether a conversion makes sense depends on your current bracket versus your expected bracket in retirement. Conversions are often looked at in years when income is lower than usual, such as between retirement and RMDs or after a business sale year, because the converted amount is taxed in the year it happens. Your own tax advisor can run the numbers.
How much of my 401(k) will I lose to taxes?
It depends on your balance, other income, state and how fast you withdraw. For large balances, federal tax alone can take from under 10% to over 30% of the pile depending on the exit. The Second Bill calculator shows the range for your number.
Does California tax Social Security?
The Franchise Tax Board says California law differs from federal law in that California does not tax Social Security benefits. Federal rules can still make part of your benefits taxable.
What happens if I miss a required minimum distribution?
The IRS says you may have to pay a 25% excise tax on the amount not distributed as required (10% if withdrawn within 2 years). Your CPA reports it on Form 5329.
How long do heirs have to empty an inherited IRA?
For a designated beneficiary who is not an eligible designated beneficiary, the IRS lists the 10-year rule: empty the entire account by the end of the 10th year following the year of the account owner's death. Spouses and some other beneficiaries have more options.
