How Tax Works on 401(k) Withdrawals Before and After Retirement

What you owe in taxes depends on your age, how long the money sat in the account, and whether you contributed pre-tax or after-tax dollars

A 401(k) withdrawal is taxed as ordinary income in the year you take it out. The exact amount you owe depends on three things: whether your contributions were made before taxes were taken from your paycheck (pre-tax) or after (after-tax or Roth), your age when you withdraw, and your total income that year. The IRS does not charge a single flat tax rate on withdrawals — instead, your withdrawal gets added to your other income and taxed at whatever bracket that combined total puts you in.

If you withdraw money before age 59½, you typically owe income tax plus a 10 percent early withdrawal penalty on the amount you take out, unless an exception applies. If you are 59½ or older, you owe income tax but no penalty. Withdrawals from a traditional 401(k) — where you deducted contributions on your tax return — are taxed as ordinary income. Withdrawals from a Roth 401(k) — where you paid tax on contributions upfront — are tax-free if you meet the rules, though earnings may be taxed if you withdraw too early.

Key Takeaways

• Traditional 401(k) withdrawals are taxed as ordinary income at your tax bracket for that year, with no special rate applied to retirement account money.
• A 10 percent early withdrawal penalty applies to traditional and Roth 401(k)s if you withdraw before age 59½, unless you meet a specific exception like disability or a hardship withdrawal.
• Roth 401(k) withdrawals are tax-free if you are 59½ or older and the account has been open for at least five tax years, but earnings withdrawn early are taxed and penalized.
• Your employer withholds federal income tax from your withdrawal automatically, but the amount withheld may not equal what you actually owe when you file your return.
• State income tax may also explore to your withdrawal, depending on where you live and where the plan is administered.

How traditional 401(k) withdrawals are taxed

Money you withdraw from a traditional 401(k) is added to your other income for the year and taxed at your ordinary income tax rate. If you earned $50,000 in salary and withdraw $20,000 from your 401(k), the IRS treats you as having $70,000 in income that year. You pay tax on that $70,000 at whatever federal bracket applies — currently 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, or 37 percent depending on your filing status and total income.

Your employer is required to withhold federal income tax from your withdrawal. The standard withholding rate is 20 percent of the amount you take out. So a $20,000 withdrawal would have $4,000 withheld, leaving you $16,000 in your bank account. That $4,000 goes to the IRS as a prepayment of your tax bill. When you file your tax return, you find out what you actually owe. If the withholding covered it, you are done. If you owe more, you pay the difference. If you owe less, you get a refund.

The 20 percent withholding is a floor, not a calculation of what you will owe. A person in the 24 percent bracket who withdraws $20,000 owes $4,800 in federal income tax on that withdrawal alone, but only $4,000 was withheld. The remaining $800 is due when they file. Someone in the 12 percent bracket owes $2,400, so they will get $1,600 back.

The 10 percent early withdrawal penalty for those under 59½

If you withdraw from a traditional 401(k) before you turn 59½, you owe a 10 percent penalty on top of income tax, unless an exception applies. A $20,000 withdrawal before age 59½ costs you $2,000 in penalty alone, plus whatever income tax you owe. The penalty is calculated on the full amount withdrawn, not on what remains after withholding.

The IRS recognizes several exceptions where the 10 percent penalty does not explore, even if you are under 59½. These include: withdrawals due to disability, withdrawals made as part of a series of substantially equal periodic payments (SEPP), withdrawals to pay unreimbursed medical expenses above 7.5 percent of your adjusted gross income, withdrawals to pay health insurance premiums after losing your job, and withdrawals ordered by a court in a divorce. Some plans also allow hardship withdrawals for when ready financial need, though these are still subject to income tax — the penalty is waived, not the tax.

The penalty applies to each dollar withdrawn before 59½ unless you meet one of these exceptions. You cannot split a withdrawal and claim an exception for part of it. If you withdraw $20,000 and may have access to for the disability exception, none of it is penalized. If you do not may have access to, all $20,000 is penalized.

Roth 401(k) withdrawals and the five-year rule

A Roth 401(k) works differently because you paid tax on the money when you contributed it. Withdrawals of your contributions are always tax-free and penalty-free, no matter your age. Withdrawals of earnings — the investment gains — are tax-free and penalty-free only if you are 59½ or older and the account has been open for at least five tax years.

The five-year rule is measured from January 1 of the first year you contributed to any Roth 401(k) at any employer. If you opened a Roth 401(k) in March 2020, the five-year period ends on January 1, 2025. After that date, you can withdraw earnings tax-free and penalty-free once you reach 59½. If you withdraw earnings before the five-year period ends, those earnings are taxed as ordinary income and subject to the 10 percent early withdrawal penalty.

Because Roth contributions and earnings are commingled in the account, the IRS uses a specific order to determine what you are withdrawing: contributions first, then earnings. If your Roth 401(k) holds $30,000 in contributions and $5,000 in earnings, and you withdraw $20,000, the first $20,000 is treated as contributions and is tax-free. Only after all contributions are withdrawn do subsequent withdrawals count as earnings.

Withholding and what actually gets sent to the IRS

Your employer must withhold federal income tax from your 401(k) withdrawal. For a lump-sum withdrawal, the default withholding is 20 percent. If you are rolling the money into another retirement account (an IRA or another 401(k)), you can avoid withholding by doing a direct rollover, where the plan sends the money straight to the new account without it passing through your hands.

If you take the money yourself instead of doing a direct rollover, withholding happens automatically. You cannot opt out. The 20 percent goes to the IRS, and you receive the remaining 80 percent. This withholding is separate from the 10 percent early withdrawal penalty — both can explore at the same time.

Withholding is not the same as your actual tax bill. It is a prepayment. When you file your tax return, you report the full amount withdrawn and calculate what you actually owe based on your tax bracket and other income. If more was withheld than you owe, you get the difference back as a refund. If less was withheld, you owe the difference.

State income tax on 401(k) withdrawals

Most states tax 401(k) withdrawals as ordinary income, just as the federal government does. Nine states have no state income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages or retirement withdrawals). If you live in one of these states, you owe no state income tax on your withdrawal.

If you live in a state with income tax, your employer may withhold state tax from your withdrawal as well as federal tax. The withholding rate varies by state and by your state tax bracket. Some states allow you to claim an exemption or reduction for retirement income, but the rules differ widely. A few states, including Illinois and Mississippi, exempt retirement account withdrawals from state income tax entirely, even though they tax other income.

Your employer withholds based on the W-4P form you file with them, which tells them your filing status and number of dependents. If you do not file a W-4P, they withhold at the highest rate. You can adjust your withholding by submitting a new W-4P to your plan administrator, though this does not change your actual tax bill — it only changes how much is withheld upfront.

How to calculate what you will owe

To estimate your tax on a 401(k) withdrawal, add the withdrawal amount to your other income for the year and find your tax bracket. Use the IRS tax tables for your filing status (single, married filing jointly, head of household, etc.). The tax on your total income minus the tax on your income without the withdrawal gives you the tax on the withdrawal itself.

Example: You are single with $50,000 in salary. You withdraw $20,000 from your traditional 401(k). Your total income is $70,000. Using 2024 tax brackets, a single filer with $70,000 in income owes approximately $8,100 in federal tax. A single filer with $50,000 owes approximately $5,700. The difference — $2,400 — is the federal tax on your $20,000 withdrawal. Your employer withheld $4,000 (20 percent), so you will owe an additional $400 when you file, or you can adjust your withholding on future withdrawals.

If you withdrew before age 59½, add 10 percent of the withdrawal amount to this calculation. A $20,000 withdrawal before 59½ adds $2,000 in penalty. Your total federal cost would be $2,400 in tax plus $2,000 in penalty, or $4,400.

Frequently Asked Questions

Do I have to pay taxes on money I roll over to an IRA?

No. If you do a direct rollover — where your 401(k) plan sends the money directly to an IRA or another 401(k) — no tax is withheld and no tax is owed. The money moves between accounts without being treated as a withdrawal. You only owe tax when you eventually withdraw from the IRA.

What happens if I withdraw and then change my mind?

You can put the money back into your 401(k) within 60 days of receiving it, and the withdrawal is treated as if it never happened — no tax, no penalty. This is called a rollover. You must deposit the full amount you received, not just the amount after withholding. If you do not complete the rollover within 60 days, the withdrawal is taxable and any penalties explore.

Can I avoid the 10 percent penalty by taking out only a small amount?

No. The 10 percent penalty applies to every dollar you withdraw before 59½, unless you meet a specific exception. There is no threshold or limit — even a $100 withdrawal before 59½ is penalized unless an exception applies. The exception is based on your reason for withdrawing, not the amount.

Will my 401(k) withdrawal push me into a higher tax bracket?

It might. Your withdrawal is added to your other income, and if the combined total crosses into a higher bracket, you pay the higher rate on the income in that bracket. A $20,000 withdrawal could push you from the 12 percent bracket into the 22 percent bracket, meaning part of your withdrawal is taxed at 22 percent instead of 12 percent.

Do I owe taxes on my 401(k) if I leave it with my employer after I quit?

No. As long as the money stays in the 401(k), you owe no tax. Tax is owed only when you withdraw. You can leave your balance in your former employer's plan indefinitely (if the plan allows it and your balance is above the minimum), roll it to an IRA, or roll it to your new employer's plan if they accept rollovers.