I read that 401k and IRA withdrawals are taxed at "your current tax bracket", as in the highest tax amount you pay in progressive income tax.

So for an illustrative example, if you are in the 10% tax bracket because you made $8000 that year, and you withdrew $400,000 from your IRA, that $408,000 would be taxed at 10%?

Or would the IRA withdrawal increase your tax bracket to 33%? (or something else)


IRA withdrawals are considered normal income. So they're taxed wherever income would be taxed if it came from any other source. Remember that tax rates are marginal; you don't "move" into another tax bracket, you just have some of your money taxed in that bracket.

So in your case, using the 2016 tax brackets and assuming a single filer, the first $9,275 would be taxed at 10%, the next $28,375 would be taxed at 15%, the next $53,500 would be taxed at 25%, the next $99,000 at 28%, etc., up to the last half or so which would be taxed at 33%.

On the other hand, given the same otherwise annual income ($8000), if you withdrew $200,000 on Dec. 31 and withdrew $200,000 on Jan 1 2017, almost all of it would fall into the 28% or less rates; you'd save 5% on almost $100,000 (or $5,000) and you'd save around another $10,000 on the other half (some at 10%, some at 15%, some at 25%).

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  • Yes, I understand, a LOT of literature says "current tax bracket" and other misleading terms that ignore the progressive income tax structure. Which is why I had to ask – CQM Nov 18 '16 at 16:05

If the money coming out of the 401K is not being rolled over into either another 401K or into an existing or new IRA then it might be taxable.

If it is taxable, then it will be used to move you through the tax brackets. So yes if you pull 400,000 from a 401K or IRA and it is taxable, then that year you will have a very big tax bill.

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