dmertz
Level 15

Retirement tax questions

I suspect that you've used the wrong code for the Form 1099-R.  The Form 1099-R for the $30,000 of distributions from the 401(k) will have code 7, not code 1.  Using code 1 will result in a 10% early-distribution penalty that should not be present.

 

Because your combined Social Security benefits are very close to $64,000, your Adjusted Gross Income increases by $1.85 for almost every $1 of income from the 401(k).  The result is that your taxable income is somewhere near $24,000 which is taxed at 10%.

 

If the money from the 401(k) is not immediately needed for spending, it would be FAR better to do Roth conversions each year of amounts that keep you just below the threshold where your taxable income becomes nonzero.  (I would expect that for 2023 that would be somewhere around $17,000 in Roth conversions, but you can wait until the near the end of 2023 to complete the Roth conversions for 2023.)  Over age 59½, amounts up to the total amount converted can be taken out of the Roth IRA at any time, free of tax and penalty.  Once it has been at least 5 years since the beginning of the year for which the first Roth contribution or conversion was made, earnings will also be free of tax and penalty.  Spend the ordinary savings first and then take other money from the Roth IRA as needed after the ordinary savings are depleted.  There is no point in having any portion of the 401(k) income taxed at a marginal tax rate of 18.5% unless you anticipate having a higher marginal tax rate in the future.  Also consider state income taxes, if any.

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