How 401(k) Withdrawals Are Taxed

Your 401(k) is taxed when you withdraw money, not when you contribute it

The tax you owe on a 401(k) depends on whether you have a traditional 401(k) or a Roth 401(k). With a traditional 401(k), you pay income tax on the full amount you withdraw at your ordinary tax rate — the same rate you pay on wages. With a Roth 401(k), you pay no tax on withdrawals if you follow the rules. The difference comes down to when you pay: traditional accounts let you defer taxes until retirement, while Roth accounts let you pay taxes now and withdraw tax-free later.

The tax rate itself is not a flat percentage. It depends on your total income for the year and your tax bracket. If you withdraw $30,000 from a traditional 401(k) and that pushes you into a higher tax bracket, some of that withdrawal will be taxed at a higher rate than the rest. Your employer will withhold a portion of each withdrawal to cover estimated taxes, but the exact amount you owe is calculated when you file your tax return.

Key Takeaways

• Traditional 401(k) withdrawals are taxed as ordinary income at your current tax bracket, while Roth 401(k) withdrawals are tax-free if you meet the account age and withdrawal rules.
• Your employer withholds a percentage of each traditional 401(k) withdrawal for federal income tax, but you may owe more or less when you file your return.
• Withdrawals before age 59½ from a traditional 401(k) trigger a 10 percent early withdrawal penalty on top of income tax, with limited exceptions.
• Required minimum distributions (RMDs) from traditional 401(k)s begin at age 73 and are taxed as ordinary income whether you need the money or not.

How traditional 401(k) tax withholding works

When you request a withdrawal from a traditional 401(k), your plan administrator withholds federal income tax before sending you the money. The withholding rate depends on what you tell them on a W-4P form (Withholding Certificate for Pension or Annuity Payments). You can choose to have them withhold a flat percentage, a specific dollar amount, or nothing at all — though withholding nothing means you will owe the full tax bill when you file.

The withholding is an estimate. If you withdraw $10,000 and they withhold 20 percent ($2,000), you receive $8,000. But when you file your tax return, the IRS calculates what you actually owe based on your total income for the year. If you owed less than $2,000, you get a refund. If you owed more, you pay the difference. The withholding is just a down payment on your tax liability.

Periodic withdrawals (monthly or quarterly payments) are treated differently from lump-sum withdrawals. With periodic payments, the withholding calculation spreads the tax across multiple payments. With a lump sum, the withholding is calculated on that single large amount, which can result in a higher withholding rate if it temporarily pushes you into a higher bracket.

Early withdrawal penalties and taxes before age 59½

If you withdraw money from a traditional 401(k) before you turn 59½, you owe both income tax and a 10 percent early withdrawal penalty on the amount withdrawn. This penalty is in addition to the ordinary income tax. So a $10,000 withdrawal before age 59½ costs you $1,000 in penalty plus whatever income tax applies to your bracket — potentially $2,000 to $3,700 or more depending on your tax situation.

Some withdrawals are exempt from the 10 percent penalty, though they still owe income tax. These exceptions include withdrawals due to disability, medical expenses that exceed 7.5 percent of your adjusted gross income, substantially equal periodic payments (SEPP), and withdrawals after separation from service at age 55 or later. If you are facing a financial hardship, some plans allow hardship withdrawals, but these are still subject to income tax and the 10 percent penalty unless an exception applies.

Roth 401(k)s have different rules. You can withdraw your contributions (the money you put in) at any time without tax or penalty. Earnings (the investment gains) withdrawn before age 59½ are subject to income tax and the 10 percent penalty, unless an exception applies.

Roth 401(k) tax treatment

A Roth 401(k) withdrawal is tax-free if two conditions are met: the account has been open for at least five tax years, and you are at least 59½ years old, disabled, deceased, or withdrawing after a may have access to hardship. If you meet both conditions, the entire withdrawal — contributions and earnings — comes out tax-free. If you do not meet both conditions, the earnings portion is taxed as ordinary income and may be subject to the 10 percent early withdrawal penalty.

The five-year rule is per account, not per contribution. If you open a Roth 401(k) in 2024, you cannot take a tax-free withdrawal of earnings until 2029, even if you are already 59½. However, you can always withdraw your own contributions without tax or penalty, regardless of age or how long the account has been open.

Unlike traditional 401(k)s, Roth 401(k)s do not have required minimum distributions during your lifetime. You can leave the money in the account as long as you want, and when you do withdraw, may have access to withdrawals are completely tax-free.

Required minimum distributions and taxes

Starting at age 73, you must withdraw a minimum amount from your traditional 401(k) each year. This is called a required minimum distribution (RMD). The amount is calculated by dividing your account balance on December 31 of the prior year by a life expectancy factor published by the IRS. The RMD is taxed as ordinary income at your current tax bracket, whether you need the money or not.

If you do not take your RMD, the IRS charges a penalty of 25 percent of the amount you should have withdrawn (reduced to 10 percent if you correct it within two years). So if your RMD is $5,000 and you do not withdraw it, you owe a $1,250 penalty plus income tax on the $5,000 when you eventually withdraw it or when the IRS catches up with you.

Roth 401(k)s are exempt from RMDs during your lifetime. If you inherit a Roth 401(k), the rules depend on your relationship to the original owner and when they died, but generally you have more flexibility than with an inherited traditional 401(k).

State and local taxes on 401(k) withdrawals

In addition to federal income tax, you may owe state and local income tax on 401(k) withdrawals. Most states tax 401(k) withdrawals as ordinary income. A few states — including Florida, Texas, Wyoming, and South Dakota — have no state income tax at all. Some states offer partial exemptions for retirement income, but the rules vary widely.

Your 401(k) plan administrator typically withholds only federal income tax unless you specifically request state withholding. If you live in a state with income tax and do not request state withholding, you will owe state tax when you file your state return. You can adjust your withholding by submitting a state W-4P form to your plan administrator.

How to estimate your tax bill on a 401(k) withdrawal

To estimate what you will owe, add the withdrawal amount to your other income for the year and find your tax bracket. The IRS publishes tax brackets annually. If your total income puts you in the 22 percent bracket, roughly 22 percent of the withdrawal will be taxed at that rate (though some may be taxed at 12 percent if it fills up a lower bracket first). Add any applicable state income tax on top of that.

For a rough estimate: a $50,000 withdrawal from a traditional 401(k) for someone in the 22 percent federal bracket and a 5 percent state bracket would owe approximately $13,500 in combined federal and state income tax, plus the 10 percent early withdrawal penalty ($5,000) if under age 59½. The actual amount depends on your full tax picture, deductions, and whether the withdrawal pushes you into a higher bracket.

Use the IRS tax withholding estimator at irs.gov or consult a tax professional before taking a large withdrawal. They can model your specific situation and recommend a withholding amount that covers your actual tax liability.

Frequently Asked Questions

Do I have to pay taxes on 401(k) contributions?

No, not when you contribute. With a traditional 401(k), contributions are made before taxes are taken out of your paycheck, so you do not pay income tax on them until you withdraw. With a Roth 401(k), you contribute after-tax dollars, so you have already paid income tax on the contributions, but withdrawals are tax-free later.

What if I roll my 401(k) into an IRA?

A direct rollover from your 401(k) to a traditional IRA is not a taxable event — no tax is owed at the time of the transfer. However, if you take a distribution and then deposit it yourself within 60 days, your employer will withhold 20 percent for taxes, and you must deposit the full amount (including the withheld portion) to avoid taxes on the shortfall.

Can I avoid taxes by borrowing from my 401(k) instead of withdrawing?

A 401(k) loan is not taxed when you borrow, and you repay it with interest. However, if you leave your job or cannot repay the loan, the outstanding balance is treated as a withdrawal and becomes taxable. If you are under 59½, the unpaid balance is also subject to the 10 percent early withdrawal penalty.

Are 401(k) withdrawals taxed differently if I am retired?

No. The tax rate depends on your total income for the year, not your employment status. If you are retired and have other income (Social Security, pensions, investment income), your 401(k) withdrawal is added to that total and taxed at the combined rate. You may also owe taxes on a portion of your Social Security benefits if your combined income exceeds certain thresholds.

What happens if my employer withholds too much tax?

The excess withholding is refunded when you file your tax return. You will receive a refund check or can explore it to next year's taxes. If you need the money sooner, you can adjust your withholding on a new W-4P form to reduce future withholding, though this means you will owe more at tax time.