The average 401(k) balance is about $351,242, but taxes can reduce how much of that money is available to spend.1 Required minimum distributions (RMDs) can create taxable income once they begin, potentially increasing your tax bill. Planning when and how you take money from your 401(k) could help limit the tax impact over retirement.
The RMD Rule That Can Raise Your 401(k) Taxes
Traditional 401(k) savings cannot stay in the account indefinitely. RMDs generally begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later, although some 401(k) participants who are still working can delay RMDs until retirement if their plan allows it. 2
An RMD is calculated by dividing the previous year end account balance by an IRS life expectancy factor. At age 73, the factor is 26.5. 3 Using a $351,242 balance, the first distribution would be $13,254.
Marginal tax rates apply to your total taxable income. If you have $200,000 in taxable income before taking a $13,254 RMD, the distribution increases that amount to $213,254. Using the 2026 federal income tax brackets for a single filer, you could be taxed as follows: 4
| Marginal Tax Rate | Taxable Income Range | Income Subject to Rate | Tax |
|---|---|---|---|
| 10% | $0 – $12,400 | $12,400 | $1,240 |
| 12% | $12,400 – $50,400 | $38,000 | $4,560 |
| 22% | $50,400 – $105,700 | $55,300 | $12,166 |
| 24% | $105,700 – $201,775 | $96,075 | $23,058 |
| 32% | $201,775 – $213,254 | $11,479 | $3,673 |
The federal income tax on $213,254 of taxable income would be about $44,697. Without the RMD, $200,000 of taxable income would result in about $40,598 of federal income tax. The $13,254 RMD therefore increases federal income tax by about $4,099 in this example. Taxes may be withheld from the distribution when it is paid, but the amount withheld may differ from the actual tax attributable to the RMD.
This example uses taxable income before credits and does not include state income taxes. The actual tax will depend on your filing status, taxable income and available credits.
How Lowering Your 401(k) Balance Could Help Reduce RMD Taxes
A Roth conversion before RMDs begin can reduce the amount held in a traditional retirement account and lower future required withdrawals. The conversion creates taxable income when it is made, so the potential benefit depends on whether you can convert the money at a lower tax rate than you expect to pay later.
Assume you convert $50,000 of the $351,242 balance before the year used to calculate your first RMD and that investment gains or losses do not change the remaining balance. This would leave $301,242 in the traditional account. Your first RMD would be about $11,368 ($301,242 divided by the IRS life expectancy factor of 26.5 at age 73). That is $1,886 less than the $13,254 required without the conversion.
With $200,000 in other taxable income, you would be taxed on $211,368 of total taxable income:
| Marginal Tax Rate | Taxable Income Range | Income Subject to Rate | Tax |
|---|---|---|---|
| 10% | $0 – $12,400 | $12,400 | $1,240 |
| 12% | $12,400 – $50,400 | $38,000 | $4,560 |
| 22% | $50,400 – $105,700 | $55,300 | $12,166 |
| 24% | $105,700 – $201,775 | $96,075 | $23,058 |
| 32% | $201,775 – $211,368 | $9,593 | $3,070 |
| Total | $211,368 | $44,094 |
In the first example, the $13,254 RMD increased taxable income to $213,254, with $44,697 in federal income tax. After the Roth conversion, the $11,368 RMD brings taxable income to $211,368, with $44,094 in federal income tax. That is $603 less for the year.
Making conversions over several years may help you reduce the balance subject to RMDs further and minimize taxes on future withdrawals. A financial advisor can calculate how much to convert each year based on income, tax bracket and projected RMDs.
Planning Roth Conversions Before RMDs Begin
Estimating your RMD several years before it begins can show how required withdrawals could affect your taxable income. Conversions are taxable when made and could offer less benefit if you pay a higher rate on the conversion than you would on future withdrawals.
A financial advisor can compare projected income and tax rates before and after RMDs begin to help determine whether Roth conversions make sense.
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