Every spring, tax preparers across the country field the same panicked call: a retiree who pulled a lump sum from a traditional IRA or 401(k) expecting a refund, only to discover the IRS wants thousands of dollars instead. The surprise is not a glitch. It is baked into the way retirement-account withdrawals are taxed and withheld, and the financial damage often ripples well beyond a single tax season, raising health-insurance costs and Medicare premiums for years.
“People think of a retirement-account withdrawal as their own money, so they don’t plan for the tax hit,” says Mark Steber, chief tax information officer at Jackson Hewitt Tax Services. “But the IRS treats every dollar coming out of a traditional IRA or 401(k) as ordinary income, and the default withholding almost never matches the real liability.”
The math starts with a mismatch. Default federal withholding on nonperiodic IRA distributions is just 10 percent, according to IRS Publication 505. For a retiree whose combined income from Social Security, a pension, and a lump-sum withdrawal lands in the 22 or 24 percent federal bracket, the withheld amount covers less than half the actual tax owed. The gap shows up as a balance due at filing time, not a refund check. State income taxes, which apply to traditional retirement-account withdrawals in most states, can widen the shortfall further.
With 401(k) plans, the rules differ but can still catch people off guard. Eligible rollover distributions from employer plans carry a mandatory 20 percent withholding rate. That is closer to the true liability for many filers, yet it still falls short if the withdrawal pushes total income into a higher bracket or triggers the cascading costs described below.
How the income spike stacks up
Retirement-account withdrawals do not exist in isolation on a tax return. They stack on top of Social Security benefits, pension income, investment gains, and any part-time earnings. The IRS explains this layering effect in its withholding and estimated tax guidance: when multiple income streams combine, the total can push a filer into a bracket that no single source would reach on its own.
Consider a married couple filing jointly for tax year 2025 with $45,000 in Social Security benefits and $25,000 from a pension. Their taxable income, after the standard deduction, sits comfortably in the 12 percent bracket. Now add a $60,000 IRA withdrawal to cover a home renovation. Part of that distribution is taxed at 12 percent, but the rest spills into the 22 percent bracket, which for 2025 begins at $96,951 for joint filers. If only 10 percent was withheld on the IRA distribution ($6,000), and the actual federal tax on that money approaches $10,000 to $13,000 depending on deductions, the couple faces a four- or five-figure shortfall when they file. The IRS may also assess an underpayment penalty, currently calculated at a rate tied to the federal short-term interest rate plus three percentage points, on top of the balance owed if insufficient tax was paid throughout the year.
The health-insurance clawback few people see coming
For anyone between 60 and 65 who buys coverage through the Affordable Care Act marketplace, a large withdrawal carries a second, less obvious cost. The ACA’s premium tax credit is calculated using modified adjusted gross income (MAGI), and every dollar pulled from a traditional IRA or 401(k) increases that figure. IRS Publication 974 details how the credit works: if a household received advance premium subsidies during the year based on a lower income estimate, and actual MAGI turns out higher, the excess advance payments must be repaid at filing time.
In practice, the numbers add up fast. A 62-year-old couple estimating $50,000 in annual income might receive $15,000 or more in advance premium subsidies over the course of a year. A $60,000 IRA withdrawal that pushes their MAGI above 400 percent of the federal poverty level can require them to repay the full excess, potentially wiping out a refund and creating a bill of several thousand dollars before the income tax itself is even settled. The IRS reconciliation process does cap repayment amounts for households below 400 percent of the poverty level, but once MAGI crosses that line, the cap disappears.
Medicare premiums: the bill that arrives two years late
Retirees 65 and older face a delayed hit through Medicare’s Income-Related Monthly Adjustment Amount, known as IRMAA. The Social Security Administration uses MAGI from the tax return filed two years earlier to set surcharges on Part B and Part D premiums. A large withdrawal reported on a 2025 return, for example, could raise monthly premiums starting in January 2027.
“I’ve had clients who took a one-time distribution to buy a vacation home and then called me two years later stunned by the Medicare surcharge letter,” says Christine Benz, director of personal finance and retirement planning at Morningstar. “The two-year lag makes it easy to forget that the IRS and SSA are still looking at that old return.”
The first IRMAA tier for 2025 kicks in at $106,000 for single filers and $212,000 for married couples filing jointly. Crossing that threshold adds $70.90 per month to the standard Part B premium for each affected beneficiary, plus a smaller Part D surcharge. Higher tiers carry steeper additions. For a couple where both spouses are on Medicare, the extra cost can exceed $1,700 per year at the first tier and climb sharply from there.
There is a safety valve, but it is not automatic. Beneficiaries who experienced a one-time income spike or a qualifying life-changing event, such as retirement or the death of a spouse, can request a reduction by filing SSA Form SSA-44. The form requires documentation, and some filers report needing multiple contacts with SSA before a correction is applied. Without that appeal, the surcharge stands for the full calendar year.
Required minimum distributions tighten the window
Once required minimum distributions begin, retirees lose some flexibility to spread taxable income across years. Under the SECURE 2.0 Act, RMDs currently start at age 73 for individuals born between 1951 and 1959, and at age 75 for those born in 1960 or later. Missing an RMD triggers a 25 percent excise tax on the amount not withdrawn. Stacking a large elective withdrawal on top of a mandatory RMD in the same calendar year compounds the bracket creep, the withholding mismatch, and the potential IRMAA and ACA consequences described above.
Ed Slott, a CPA and founder of IRAHelp.com, has long warned about this compounding effect. “The year you start RMDs is the worst possible time to also take a big extra distribution,” Slott says. “You’re doubling the tax damage and potentially locking in higher Medicare costs for the next year.” He notes that Roth conversions done strategically in lower-income years before RMDs start have become a popular planning tool. Converting a portion of a traditional IRA to a Roth triggers tax in the conversion year but removes those assets from future RMD calculations and future taxable withdrawals. The trade-off only works, however, if the conversion itself is sized carefully enough to avoid the same bracket and subsidy problems a large withdrawal would cause.
What advisers say to do before writing the check
Financial planners who work with retirees consistently recommend several steps before taking a sizable distribution from a tax-deferred account:
- Run a tax projection first. Use tax software or work with a CPA to model how the withdrawal changes total taxable income, the effective tax rate, and any credits or deductions that phase out at higher income levels. Include state taxes in the projection.
- Increase withholding or make estimated payments. Taxpayers can request withholding above the 10 percent default on IRA distributions by submitting Form W-4R to the custodian. Alternatively, quarterly estimated tax payments can cover the gap and help avoid underpayment penalties.
- Check ACA subsidy eligibility. Anyone receiving advance premium tax credits should recalculate expected MAGI before taking the distribution and, if necessary, adjust the advance payment amount through the marketplace to avoid a large repayment at filing.
- Map the IRMAA impact. Compare projected MAGI against the current IRMAA thresholds published by SSA. If the withdrawal will push income above a tier, weigh whether the added Medicare cost over the following year is acceptable or whether splitting the withdrawal across two tax years would keep income below the line.
- Consider the source of funds. Withdrawals from Roth IRAs, assuming the account has been open at least five years and the owner is 59½ or older, are not included in MAGI and do not trigger any of the cascading effects described here. Taxable brokerage accounts may also produce a smaller tax hit if the gains qualify for long-term capital gains rates. For those under 59½, traditional IRA and 401(k) withdrawals also carry a 10 percent early withdrawal penalty on top of ordinary income tax, unless an exception applies.
Why the full picture matters more than the withdrawal itself
No public IRS or SSA dataset tracks how many taxpayers lose refunds specifically because of large retirement withdrawals in a given year. The rules and the math are well documented, but aggregate data on how frequently the problem occurs has not been published. The same information gap applies to ACA subsidy clawbacks tied to retirement-account distributions and to IRMAA appeal outcomes after one-time income spikes.
What is clear, as of May 2026, is that the current rules remain in effect and the mechanisms are predictable enough to plan around. A single large withdrawal can quietly raise a retiree’s tax bill, eliminate a refund, trigger subsidy repayments, and inflate Medicare premiums years down the road. The advisers who see these cases regularly say the same thing: model the full financial picture before moving the money, because the IRS and SSA will be looking at the same return you are.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
