How Taxes Work on 401(k) Withdrawals

Tax on 401(k) distributions depends on whether your account is traditional or Roth, your age, and how long you've held the account

A traditional 401(k) withdrawal is taxed as ordinary income in the year you take it out. The IRS taxes it at your regular income tax rate — the same rate applied to your salary or wages. If you withdraw $10,000 from a traditional 401(k) and you're in the 22% tax bracket, you owe roughly $2,200 in federal income tax on that withdrawal, though the exact amount depends on your total income that year and your filing status.

A Roth 401(k) withdrawal works differently. Money you contributed (called your "basis") comes out tax-free. Earnings on that money are tax-free too, but only if you've held the account for at least five years and you're age 59½ or older, disabled, or deceased. If you don't meet those conditions, the earnings portion is taxed as ordinary income, and you may owe a 10% early withdrawal penalty on top.

Your employer withholds federal income tax automatically from traditional 401(k) distributions unless you tell them not to. The withholding rate is set by IRS tables based on how much you're taking out and your W-4 information. State income tax may also be withheld, depending on where you live and your plan's rules.

Key Takeaways

• Traditional 401(k) withdrawals are taxed as ordinary income at your regular tax rate; Roth 401(k) contributions and earnings come out tax-free if you're 59½ and have held the account five years.
• Your employer withholds federal income tax from traditional 401(k) distributions automatically, but the amount withheld may not equal your actual tax bill.
• Withdrawals before age 59½ from a traditional 401(k) trigger a 10% early withdrawal penalty on top of income tax, with limited exceptions.
• Roth 401(k) earnings withdrawn before age 59½ are taxed as ordinary income plus a 10% penalty, even though contributions always come out tax-free.

How withholding works on traditional 401(k) distributions

When you request a distribution from a traditional 401(k), your plan administrator withholds federal income tax before sending you the money. The withholding is based on IRS Publication 15-T tables and your W-4 form on file with your employer. If you claim zero allowances on your W-4, more tax is withheld; if you claim more allowances, less is withheld.

The amount withheld is not necessarily the amount you'll owe. If you take a large lump-sum distribution, the withholding may be too high because the IRS tables assume the payment is part of regular paychecks spread across the year. Conversely, if you have other income that year, your actual tax bill could be higher than what was withheld. You settle the difference when you file your tax return.

You can request a different withholding rate by submitting a new W-4 to your plan administrator, or you can ask them to withhold a specific dollar amount. Some people choose zero withholding, but then they owe the full tax bill when they file — this is risky if you don't have the money set aside.

Early withdrawal penalties and exceptions

If you withdraw from a traditional 401(k) before age 59½, you owe a 10% early withdrawal penalty on top of ordinary income tax. A $10,000 early withdrawal means $1,000 in penalty plus income tax on the full $10,000.

The IRS allows several exceptions to this penalty. You can withdraw without penalty if you are separated from service (left your job) in the year you turn 55 or later — this is called the "Rule of 55." You can also avoid the penalty if you are disabled, if you're taking substantially equal periodic payments under IRS Rule 72(t), if you're paying medical expenses that exceed 7.5% of your adjusted gross income, or if you're a beneficiary withdrawing from a deceased person's account.

Roth 401(k) contributions can always be withdrawn without penalty or tax, regardless of age. But if you withdraw earnings before 59½ and haven't held the account five years, you owe both income tax and the 10% penalty on the earnings portion only.

Required minimum distributions and tax

Once you reach age 73 (as of 2023), the IRS requires you to withdraw a minimum amount from your traditional 401(k) each year, 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. You must take your first RMD by April 1 of the year after you turn 73.

RMDs are taxed as ordinary income. Your plan will withhold federal tax automatically, but as with other distributions, the withholding may not match your actual tax bill. If you fail to take an RMD, the IRS charges a penalty equal to 25% of the amount you should have withdrawn (reduced to 10% if you correct it within two years).

Roth 401(k)s are subject to RMDs during the account owner's lifetime. However, if you roll a Roth 401(k) into a Roth IRA, the RMD requirement goes away, and you can leave the money untouched for as long as you live.

State income tax on 401(k) distributions

Federal income tax is only part of the picture. Most states tax 401(k) distributions as ordinary income. Your plan may withhold state tax automatically, or it may not, depending on your state and your plan's rules. Some states do not tax retirement income at all — including Florida, Texas, Wyoming, and South Dakota — so residents of those states owe no state tax on 401(k) withdrawals.

If you move to a different state after you retire, you may owe tax to your new state on distributions you receive there. The rules vary widely by state. Some states tax only distributions taken after you move; others tax distributions based on where the money was earned. If you're planning to relocate, check your current state's rules and your destination state's rules before you start taking distributions.

Taxes on lump-sum distributions and rollovers

A lump-sum distribution is a withdrawal of your entire 401(k) balance in a single payment, usually when you leave your job or retire. The full amount is subject to income tax and withholding. If you're under 59½, the 10% early withdrawal penalty applies to the taxable portion unless an exception applies.

If you roll the distribution into an IRA or another 401(k) within 60 days, you can avoid when ready taxation. This is called a "rollover." The money moves to the new account tax-free, and you don't owe tax until you withdraw from that account later. If you miss the 60-day window, the full amount is taxed as a distribution, and you may owe penalties.

A direct rollover is safer: your plan sends the money directly to the new account, and no tax is withheld. With an indirect rollover, the plan sends the check to you, withholds 20% for federal tax, and you have 60 days to deposit the full amount (including the withheld 20%) into the new account. If you can't cover the withheld amount, that portion is treated as a taxable distribution.

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

To estimate federal income tax on a traditional 401(k) withdrawal, multiply the withdrawal amount by your marginal tax rate — the tax bracket you fall into based on your total income for the year. If you're in the 22% bracket and withdraw $20,000, your federal income tax is roughly $4,400. Add the 10% early withdrawal penalty ($2,000) if you're under 59½ and no exception applies. Then add your state income tax if your state taxes retirement income.

This is an estimate only. Your actual tax bill depends on your full income picture for the year, deductions, credits, and filing status. If you have questions about your specific situation, consider speaking with a tax professional who can review your complete tax return.

Your plan administrator can also provide a tax projection. Some plans have online tools that show estimated withholding based on your withdrawal amount and W-4 information. The IRS website offers tax calculators and worksheets in Publication 17 (Your Federal Income Tax) and Publication 575 (Pension and Annuity Income).

Frequently Asked Questions

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

Traditional 401(k) contributions reduce your taxable income in the year you make them, so you don't pay income tax on them upfront — you pay tax when you withdraw. Roth 401(k) contributions are made with after-tax money, so you've already paid income tax on them and owe no tax on withdrawals (as long as you meet the age and holding-period rules).

What happens if I don't have enough withheld from my 401(k) distribution?

If too little tax is withheld, you'll owe the difference when you file your tax return. You may also owe estimated tax penalties if you underpay by a large amount. You can adjust your withholding by submitting a new W-4 to your plan, or you can make estimated tax payments to the IRS directly.

Can I withdraw from my 401(k) without paying the 10% penalty?

Yes, if you meet an exception. The most common are: you're 55 or older and separated from service, you're disabled, you're taking substantially equal periodic payments under IRS Rule 72(t), or you're paying unreimbursed medical expenses above 7.5% of your adjusted gross income. Roth 401(k) contributions can always be withdrawn without penalty.

What's the difference between a rollover and a distribution in terms of taxes?

A distribution is taxed when ready as ordinary income. A rollover to an IRA or another 401(k) within 60 days avoids when ready taxation — the money grows tax-deferred in the new account until you withdraw it. A direct rollover (plan to plan) is safer because no tax is withheld; an indirect rollover (plan to you to plan) triggers 20% withholding.

Do I owe taxes on a Roth 401(k) withdrawal if I'm over 59½?

No, if you've held the Roth 401(k) for at least five years. Both your contributions and earnings come out tax-free. If you haven't held it five years, the earnings portion is taxed as ordinary income, though the contributions themselves are always tax-free.