How 401(k) Taxes Work After Retirement and When You Actually Pay Them

This is one of my favorite questions because it’s loaded.

“Stan, do you pay income tax on your 401(k) in retirement?”

The short answer is yes.
The real answer is it depends on when the money comes out.

What a 401(k) Actually Is

A 401(k) is an employer-sponsored retirement plan.

You contribute.
The employer may match.
The money grows inside market-based investments.

The entire structure is built around tax deferral.

You’re not paying taxes today so you can put them off until later.

Leaving a Job Does Not Trigger Taxes

This is where people get tripped up.

When you leave a job, you do not have to pay taxes on your 401(k).

You can transfer it as a non-taxable event into an IRA.

401(k) to IRA.
No taxes.
Still tax deferred.

That’s your money. You haven’t triggered anything.

Tax Deferral Does Not Last Forever

Eventually, the IRS shows up.

At the Required Minimum Distribution age, the IRS requires you to start taking money out.

It doesn’t matter if you need it.
It doesn’t matter if you don’t want it.

It’s required.

When those distributions come out, they are taxed at ordinary income levels, based on current rules.

That’s the trade-off for all that tax deferral.

Using a 401(k) for Lifetime Income

Some people reach retirement and say:

“I don’t want market risk anymore. I want income.”

In that case, a 401(k) can be transferred as a non-taxable event into a lifetime income annuity.

Again, no taxes on the transfer.

But once the income starts, the money coming out is taxable, just like Required Minimum Distributions.

Different path. Same tax result when income begins.

The Question That Actually Matters

This is where people miss the point.

The real question isn’t taxes.

The real question is:

What do you want the money to contractually do?
And when do you want those contractual guarantees to start?

That’s how decisions should be made.

Annuities Are Not Growth Tools

Annuities are bought for contractual guarantees.

Principal protection.
Income for life.
Legacy.
Long-term care.

There’s no growth category.

You own annuities for what they will do, not what they might do.

Bringing It All Together

Your 401(k) is an asset.

You can:

• Keep deferring it in an IRA
• Take Required Minimum Distributions later
• Convert part or all of it into lifetime income

But one thing is unavoidable under current rules.

Eventually, the IRS is going to require taxes when money comes out.

My Bottom Line

You don’t pay taxes on your 401(k) when you leave a job.

You pay taxes when money comes out.

You can delay it.
You can structure income.
But tax deferral is not tax elimination.

Understand the rules. Then decide what the money needs to do.