Your 401(k) Looks Healthy — But Have You Calculated What Taxes Could Take?

A $750,000 401(k) balance looks like a serious retirement accomplishment. Unfortunately, your account statement doesn’t include a preview of your future tax bill. If you built that balance with traditional pretax contributions, the IRS still expects its share when you withdraw the money. Your retirement account shows how much you’ve accumulated, not how much you can actually spend.

That gap can complicate everything from deciding when to retire to figuring out whether you can afford a long-awaited vacation. The tax bill won’t necessarily devour your savings, but ignoring it can leave your retirement budget looking more comfortable than reality allows. A few decisions made before withdrawals begin can also influence how much money stays in your pocket.

Your Balance Is Not Your Spending Budget

Traditional 401(k) contributions generally reduce your taxable income when you make them, which helps explain their appeal during your working years. Your investments can then grow without annual taxes on their earnings inside the account. The bill typically arrives when you withdraw the money, because those distributions count as ordinary income. In other words, years of tax-deferred growth don’t make the eventual withdrawal tax-free.

Consider a hypothetical retiree with $750,000 in a traditional 401(k). That person hasn’t necessarily accumulated $750,000 in spendable retirement money. If withdrawals eventually face a combined effective tax rate of 20%, for example, withdrawing $40,000 would leave $32,000 after those taxes. The actual rate could be higher or lower, depending on other income, deductions, filing status, and state taxes. Still, the example illustrates why a retirement plan needs to account for the money that leaves the account and the money that reaches the checking account.

Your Tax Bracket Depends on More Than Your 401(k)

Retirement can bring a welcome change: the paycheck stops, and so does the income that came with it. Unfortunately, Social Security benefits, pension payments, investment income, and traditional 401(k) withdrawals can still affect your tax bill. The IRS adds taxable income from these sources when calculating your federal income tax. A large withdrawal can push some of your income into a higher tax bracket, even if your regular retirement spending seems modest.

Here’s a detail worth remembering: moving into a higher bracket doesn’t mean every dollar suddenly faces the higher rate. Federal income taxes use graduated brackets, so different portions of taxable income face different rates. For 2026, the federal marginal rates range from 10% to 37%, depending on taxable income and filing status.

That structure gives retirees a reason to think carefully about withdrawal timing. Someone who takes a large lump sum to replace a roof, buy a car, or help an adult child might generate more taxable income than someone who spreads those expenses across multiple years. The household still needs the money, of course, but the calendar can influence the tax consequences. A withdrawal plan should account for both ordinary spending and the occasional expensive year.

Social Security Can Complicate the Calculation

Many retirees expect Social Security to provide a relatively simple foundation for their budget. Then traditional 401(k) withdrawals enter the picture, and the tax calculation gets more complicated. Depending on a retiree’s combined income, as much as 85% of Social Security benefits can become subject to federal income tax. That doesn’t mean the government automatically takes 85% of the benefits. It means that portion may count as taxable income.

Picture a couple that receives Social Security and occasionally withdraws extra money from a traditional 401(k). A distribution for a new vehicle or a family trip could increase their taxable income and affect how much of their benefits becomes taxable. The withdrawal might still make perfect financial sense, but its cost extends beyond the amount removed from the retirement account. State tax rules can add another layer, depending on where the couple lives.

This is why retirement calculators deserve a little skepticism when they focus exclusively on account balances and projected investment returns. A useful estimate should also consider other income sources and likely taxes. Otherwise, the calculator may tell you that you can afford a particular lifestyle without fully accounting for what that lifestyle costs after taxes.

Required Withdrawals Can Disrupt a Carefully Planned Budget

Some retirees would prefer to leave their savings invested and withdraw money only when necessary. Federal rules eventually limit that flexibility for traditional 401(k) accounts. Required minimum distributions, commonly called RMDs, generally begin at age 73, although workplace-plan rules can allow some employees to delay distributions until retirement. Exceptions apply, including different rules for certain business owners.

RMDs can create a peculiar retirement problem: you may need to withdraw taxable money even when you don’t need the cash. Suppose your living expenses are already covered by Social Security, a pension, and other savings. A required distribution from your traditional 401(k) could still increase your taxable income. You might save the remaining cash or invest it elsewhere, but the distribution itself can trigger a tax bill.

Planning ahead gives you more room to prepare for those withdrawals. Reviewing projected RMDs alongside pension income, Social Security, and other investments can help you anticipate years when taxable income might rise. Retirement doesn’t have to follow a perfectly predictable script, but a budget works better when it accounts for expenses the government schedules for you.

Roth Savings Can Change the Tax Equation

A Roth 401(k) offers a different arrangement. Contributions generally come from money you’ve already paid income tax on, rather than reducing your taxable income today. In return, qualified withdrawals of contributions and investment earnings generally come out tax-free. The IRS requires the applicable five-tax-year period and a qualifying event, such as reaching age 59½, for earnings to receive that treatment.

Having both traditional and Roth savings can provide more flexibility in retirement. A retiree might use traditional funds for some expenses and qualified Roth withdrawals for others, potentially managing taxable income more deliberately. That approach won’t automatically produce a lower tax bill, because the outcome depends on income, account balances, tax rules, and future circumstances.

Converting traditional 401(k) money to Roth savings can also create a current tax bill. A conversion generally makes previously untaxed money taxable in the year of conversion. The decision therefore involves a trade-off: pay taxes sooner in exchange for potentially tax-free qualified withdrawals later. Paying a large bill now simply to avoid a possible future bill doesn’t guarantee a better outcome.

Calculate What You Keep Before Retirement Begins

Start by separating retirement savings into account types. Traditional 401(k) money generally carries future income-tax obligations, while qualified Roth withdrawals receive different treatment. Then estimate income from Social Security, pensions, investments, and any planned employment. These figures provide a more realistic starting point than an account balance alone.

Next, model several withdrawal amounts and compare the estimated federal and state tax consequences. Include occasional expenses, such as replacing a vehicle or renovating a home, rather than assuming every retirement year will look identical. The IRS’s published tax brackets and retirement-distribution guidance offer useful starting points, while a qualified tax professional can help evaluate circumstances that a basic calculator misses.

Would you rather pay more taxes during your working years for potentially tax-free Roth withdrawals later, or keep enjoying the upfront tax break of a traditional 401(k)?