Pension Income Drawdown: Taxes, Penalties, and RMDs

Money you take from a traditional 401(k), IRA, 403(b), or similar pre-tax retirement account is free of the 10% early-withdrawal penalty starting at age 59½, but the full amount still counts as ordinary income on your federal return, with 2026 brackets running from 10% to 37%. Roth accounts, required minimum distributions after age 73, and a list of penalty exceptions change the picture depending on your situation. These are the retirement account withdrawal rules and taxes that decide what actually lands in your bank account.

The Ages That Change What You Owe

Three age lines matter.

The first is 59½. Withdrawals from a traditional IRA, 401(k), 403(b), or most other qualified plans before that birthday carry a 10% additional tax on top of regular income tax.¹ Once you pass 59½, the penalty disappears and you can take any amount at any time, though traditional-account distributions remain taxable.²

The second is 55, sometimes called the Rule of 55. If you leave a job during or after the calendar year you turn 55, you can withdraw from that employer’s 401(k) or 403(b) without the 10% penalty. Public safety employees in governmental plans get the same treatment at age 50. The exception only reaches the plan held by the employer you separated from. It does not apply to IRAs or to old employer plans you’ve already rolled over.²

The third is 73. Required minimum distributions start the year you hit 73, and that starting age rises to 75 for anyone who turns 73 after December 31, 2032.³ If you’re still working past 73 and don’t own more than 5% of the company, you can hold off on RMDs from your current employer’s plan until you actually retire. That delay doesn’t reach your IRAs.⁴

How Federal Tax Hits the Withdrawal

Traditional Pre-Tax Accounts

Every dollar withdrawn from a traditional 401(k), traditional IRA, 403(b), or similar pre-tax account is ordinary income in the year you receive it. It stacks on top of wages, Social Security, pension payments, and anything else you report. For 2026, the federal brackets for a single filer are:⁵

10% on taxable income up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Married couples filing jointly get roughly double those bracket thresholds. The 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers. A large one-time distribution can push part of the withdrawal into a higher bracket than the rest of your income sits in, which is why spreading withdrawals across tax years is a common way to hold down the effective rate.

Distributions from qualified retirement plans are not subject to the 3.8% net investment income tax that applies to certain investment income above set thresholds.⁶

Roth Accounts

Roth IRAs and Roth 401(k)s work differently because the money went in after tax. You can take your own Roth IRA contributions out at any time, tax-free and penalty-free, at any age. Earnings are only tax-free if two conditions are both satisfied: at least five years have passed since your first Roth contribution, and you’ve reached 59½ (or qualify under another exception such as disability or death). Miss either condition and the earnings portion may be taxable and may also carry the 10% early withdrawal penalty.

If your traditional IRAs hold a mix of deductible and nondeductible contributions, the IRS treats all of them as one pool for distributions and Roth conversions. Each withdrawal is partly taxable and partly tax-free in proportion to pre-tax and after-tax money across all your traditional IRAs. You cannot pull only the after-tax dollars. This pro-rata rule catches many people off guard on backdoor Roth conversions.

Withholding and the 1099-R

When a 401(k) or similar employer plan sends you an eligible rollover distribution, the plan must withhold 20% for federal taxes before cutting the check, even if you intend to roll it over.⁷ That 20% is a prepayment credited on your return. IRA distributions default to 10% withholding, and you can elect out or ask for more.

Every plan administrator or IRA custodian that pays you $10 or more issues a Form 1099-R showing the amount, the taxable portion, and a distribution code explaining why the money went out.⁸ Common codes include 1 (early distribution, no known exception), 7 (normal distribution at or after 59½), and G (direct rollover). A wrong code can trigger an IRS notice asking why you didn’t pay the early withdrawal penalty, so ask the plan for a corrected form before filing if the code doesn’t match your situation.

If you’re retired and living off distributions without wage withholding, you may need quarterly estimated tax payments to avoid an underpayment penalty, or you can ask the custodian to withhold a higher percentage from each distribution.

The 10% Early Withdrawal Penalty and Its Exceptions

Take money from a qualified retirement plan or IRA before 59½ and the default rule is a 10% additional tax on top of regular income tax.¹ A $10,000 early withdrawal at the 22% bracket costs $3,200 in combined federal tax and penalty. Exceptions can wipe out the penalty piece if your situation fits one:²

Separation from service at 55 or older from that employer’s plan (age 50 for public safety employees in governmental plans)
Substantially equal periodic payments under an IRS-approved method
Total and permanent disability, or distributions to a beneficiary after the account holder’s death
Unreimbursed medical expenses above 7.5% of adjusted gross income
Health insurance premiums while unemployed (IRAs only)
First-time home purchase, up to $10,000 lifetime, from an IRA
Qualified higher education expenses from an IRA
Birth or adoption, up to $5,000 per child
Federally declared disaster, up to $22,000 per qualifying disaster
Domestic abuse victim, up to the lesser of $10,000 or 50% of the account (for distributions after December 31, 2023)
Emergency personal expense, one per year up to the lesser of $1,000 or the vested balance over $1,000 (for distributions after December 31, 2023)
Distributions required by an IRS levy on the plan

Penalty-free is not tax-free. Except for Roth contributions coming back out, every traditional-account distribution is still taxable income no matter which exception spares you the 10%.

One exception worth flagging for anyone thinking about it: substantially equal periodic payments, sometimes called the 72(t) method. It lets you tap a retirement account at any age before 59½ without the penalty, but you commit to a payment schedule under one of three IRS-approved calculation methods and must stick with it for at least five years or until age 59½, whichever is later.⁹ Modifying the payments before then triggers retroactive application of the 10% penalty to every distribution taken under the plan, plus interest. One switch is allowed, from fixed amortization or annuitization to the RMD method. Otherwise, changes trigger the recapture tax.

A separate route while still employed is a 401(k) hardship withdrawal for an immediate and heavy financial need, such as certain medical expenses, preventing eviction or foreclosure, funeral costs, or tuition for the next 12 months. The amount is limited to what’s necessary, and the money can’t be repaid or rolled over. Hardship distributions are taxable, and the 10% early withdrawal penalty still applies under 59½ unless another exception fits. Not every plan allows them; the plan document has to say so.¹⁰

Required Minimum Distributions After 73

Once you reach the RMD starting age, the IRS forces annual withdrawals from traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored plans. Roth IRAs are the exception during the original owner’s lifetime, so no RMDs are required from a Roth IRA while you’re alive.⁴

The math is simple. Take the account balance as of December 31 of the prior year and divide by a life expectancy factor from IRS tables. Most people use the Uniform Lifetime Table in Publication 590-B. A separate Joint and Last Survivor table applies if your sole beneficiary is a spouse more than ten years younger.¹¹ With multiple traditional IRAs, you calculate each RMD separately but can pull the total from any single IRA or combination. Employer plans don’t get that flexibility. Each plan’s RMD comes from that specific plan.

Miss an RMD and the excise tax is 25% of the amount you should have withdrawn. Correct the shortfall within two years and the penalty drops to 10%.⁴ You report the shortfall on Form 5329.

If you’re at least 70½ and charitably inclined, a qualified charitable distribution lets you send up to $111,000 in 2026 directly from an IRA to a qualifying charity. The QCD satisfies the RMD for the year without adding to your taxable income.

Rollovers Without Triggering Tax

Moving retirement funds between accounts is common at job changes or during consolidation. A direct rollover (trustee-to-trustee transfer) is the clean option: money moves between institutions without you touching it, no withholding, no tax. An indirect rollover routes the check to you first, and that’s where things get complicated.¹²

On an indirect rollover from an employer plan, the plan withholds 20% before sending you 80%. You then have 60 days to deposit the full original amount, not just the 80% you received, into another eligible retirement account. The 20% withheld is credited on your tax return, but you have to front that 20% from other funds to complete the rollover. Deposit only 80% and the missing 20% becomes a taxable distribution.⁷

IRA-to-IRA rollovers carry a separate limit: only one indirect rollover across all your IRAs in any 12-month period. Direct trustee-to-trustee transfers don’t count against that limit.¹²

State Tax Is a Separate Layer

Federal tax is only part of what comes out of a withdrawal. State treatment varies widely. Roughly a dozen states impose no income tax at all on retirement income, others tax it at the same rates as wages, and some offer partial exclusions that exempt a fixed dollar amount or percentage of pension and retirement income. Many states that tax private retirement income still fully exempt military or government pensions.

Your state of residence when the distribution is received determines which state gets to tax it. If you’re thinking about relocating in retirement, the difference between a state that fully taxes retirement income and one that doesn’t can run into thousands of dollars a year on larger withdrawals. Check current rules for the state you actually live in before assuming a strategy carries over from where you worked.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners of Retirement Accounts
4
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
6
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
7
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
8
Internal Revenue Service. Instructions for Forms 1099-R and 5498
9
Internal Revenue Service. Substantially Equal Periodic Payments
10
Internal Revenue Service. Retirement Topics – Hardship Distributions
11
Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements (IRAs)
12
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions