Common Mistake #38: Not Accounting for Taxes When Withdrawing From Retirement Accounts

For many investors, retirement planning focuses heavily on accumulation. Contributions are tracked, balances are monitored, and growth is celebrated. But when withdrawals begin, the framing often shifts too late. According to IRS rules, distributions from traditional IRAs and 401(k)s are generally treated as ordinary taxable income, not as tax-free cash.

This article explains why failing to account for taxes when withdrawing from retirement accounts is a common and costly mistake, how it can distort spending expectations, and why retirement outcomes are often determined more by withdrawal strategy than by headline balances.

Key takeaways

• Withdrawals from traditional retirement accounts are generally taxable income.
• Gross balances can overstate real, spendable wealth.
• Poor withdrawal planning can increase the lifetime tax burden.
• Taxes during retirement are a sequencing issue, not a footnote.
• Net income matters more than account size.

Why retirement withdrawals feel simple

During working years, taxes are familiar. Paychecks arrive net of withholding. The system feels automatic. In retirement, many expect a similar experience: withdraw what's needed and move on.

There's also a psychological anchor. A $1 million retirement account feels like $1 million available to spend. The distinction between pre-tax and after-tax dollars fades after decades of accumulation.

Up to this point, nothing feels misleading.

That's why this mistake is so common.

Here's the Assumption That Quietly Breaks the Math

Traditional retirement accounts defer taxes - they don't eliminate them.

When withdrawals begin, each dollar taken out increases taxable income. That income can:

• Push retirees into higher tax brackets
• Increase taxes on Social Security benefits
• Affect Medicare premiums or other thresholds

So what? The amount withdrawn is not the amount available to spend.

This is where planning based on gross balances starts to unravel.

This is where spending expectations get distorted

Hypothetical example: Imagine a retiree planning annual spending based on a desired withdrawal amount from a traditional 401(k). The gross withdrawal appears sufficient. After taxes, the net amount falls short.

To compensate, withdrawals increase. Taxes rise further. Over time, the gap widens.

The issue isn't overspending. It's underestimating the tax impact.

This is how retirement plans that sound good on paper begin to strain in practice.

Why taxes matter more during withdrawals than contributions

During accumulation, taxes are deferred into the future. During retirement, taxes become immediate and cumulative. Withdrawal order, timing, and account type can all influence:

• Total taxes paid over retirement
• Cash flow stability
• Longevity of savings

Small differences in withdrawal decisions - especially early in retirement - can cascade into larger tax consequences later.

This isn't about predicting tax law. It's about recognizing that taxes don't stop at retirement.

Why does this mistake often appear late

Many retirement projections show balances, not after-tax income. Statements emphasize account value, not net spendable dollars. Tax impact is assumed to be "lower later."

But retirement income often comes from multiple sources: retirement accounts, Social Security, pensions, and taxable assets. Their interaction determines the actual tax outcome.

The problem isn't ignorance. It's an incomplete framing.

Taxes don't announce themselves. They reveal themselves over time.

The reframe that changes retirement planning

Investors who avoid this mistake often adopt a simple reframe:

Retirement planning is about net income, not gross withdrawals.

This reframing shifts focus from how much is taken out to how much is kept.

Supporting considerations - such as understanding how different account types are taxed or modeling after-tax income - exist to improve clarity, not to mandate specific actions.

The goal isn't minimizing taxes at all costs. It's avoiding surprises.

When tax impact may be smaller - but still matters

Some retirees may face lower tax rates due to reduced income. Others may have a mix of taxable and tax-advantaged accounts that soften the impact.

The distinction, consistent with the rest of this series, is awareness.

Taxes become a mistake when they're ignored in planning - not when they're acknowledged and managed within realistic expectations.

Retirement doesn't end taxation. It changes its shape.