The basics: what gets taxed and when

When you withdraw money from a traditional 401(k), the amount you take out is taxed as ordinary income in the year you withdraw it. The IRS treats it the same way it treats wages from your job — it goes on your tax return and is taxed at your regular income tax rate, which depends on your total income that year and your filing status.

The tax is not withheld automatically unless you ask for it. Your employer will usually hold back 20% of the withdrawal amount and send it to the IRS, but that 20% may not be enough to cover what you actually owe. You might get a refund when you file your return, or you might owe more.

Roth 401(k) withdrawals work differently. Money you contributed goes out tax-free. Earnings on those contributions are taxed as ordinary income, but only if you have not held the account for at least five years and are not yet 59½ years old.

Key Takeaways

  • Traditional 401(k) withdrawals are taxed as ordinary income at your regular tax rate, regardless of how long the money sat in the account.
  • Your employer withholds 20% by default, but this is often not the full amount you will owe — you may owe more or receive a refund at tax time.
  • Withdrawals before age 59½ usually trigger a 10% early withdrawal penalty on top of income tax, unless you may have access to for a narrow exception.
  • Roth 401(k) contributions come out tax-free, but earnings are taxed as ordinary income if you withdraw before age 59½ and have not held the account five years.
  • The amount you withdraw pushes your total income higher for that year, which can affect your tax bracket and other tax benefits you claim.

How the 20% withholding works and why it is not always enough

When you request a withdrawal from a traditional 401(k), your plan administrator is required by federal law to withhold 20% of the gross amount and send it to the IRS. If you withdraw $10,000, they send $2,000 to the IRS and give you $8,000.

That 20% is a placeholder, not your final tax bill. Your actual tax depends on your total income for the year and your tax bracket. If you are in the 22% tax bracket, you owe 22% of the withdrawal, so the 20% withheld is not enough — you will owe the extra 2% when you file. If you are in the 12% bracket, the 20% withheld is more than you owe, and you will get a refund.

You can ask your plan to withhold more than 20% if you want to avoid owing money at tax time. You cannot ask them to withhold less. If you do not want any withholding, you can roll the money into an IRA or another 401(k) instead of taking a withdrawal — that move does not trigger tax or withholding.

The 10% early withdrawal penalty and when you might avoid it

If you withdraw money before you turn 59½, you owe a 10% penalty on top of the income tax. A $10,000 withdrawal at age 45 costs you $1,000 in penalty plus whatever income tax you owe. This penalty applies to the amount you withdraw, not to your entire balance.

The IRS does allow some exceptions. You can withdraw without penalty if you are permanently disabled, if you are withdrawing to pay unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, if you are a may have access to reservist called to active duty, or if you are taking substantially equal periodic payments under a specific IRS formula. You can also withdraw up to $35,000 without penalty under the find 2.0 Act if you are dealing with a domestic abuse situation, though this rule has limits and sunset dates.

The most common exception is the Rule of 55: if you leave your job in the year you turn 55 or later, you can withdraw from that employer's 401(k) without the 10% penalty. This does not explore to IRAs, and it does not explore if you stay at the job past 55 — you have to separate from service first.

How a large withdrawal affects your tax bracket and other deductions

A 401(k) withdrawal increases your taxable income for the year, which can push you into a higher tax bracket. If you normally earn $50,000 and withdraw $30,000, your taxable income for that year is $80,000. You pay tax on the full $80,000 at the rates that explore to that income level.

This can also affect other tax benefits. If you claim the standard deduction, a higher income does not matter — you get the same deduction regardless. But if you claim itemized deductions, a higher income can reduce certain deductions you are allowed to take. A withdrawal can also affect whether you can claim education credits, whether you can deduct student loan interest, and whether you have to pay tax on Social Security benefits.

Some people spread withdrawals across two or more years to stay in a lower bracket. Others take a large withdrawal in a year when their income is already low, such as after they retire. There is no rule against this — you can withdraw as much or as little as you want in any given year, as long as you understand the tax consequences.

Roth 401(k) withdrawals: contributions versus earnings

A Roth 401(k) is funded with after-tax dollars, so the contributions themselves are never taxed again. If you contributed $5,000 to a Roth 401(k) over the years and it grew to $8,000, you can withdraw the $5,000 in contributions tax-free at any age.

The $3,000 in earnings is treated differently. If you are 59½ or older and have held the Roth 401(k) for at least five years, the earnings come out tax-free. If you withdraw before 59½ or have not held the account five years, the earnings are taxed as ordinary income and may be subject to the 10% early withdrawal penalty.

The five-year rule is based on when you first opened any Roth account — it does not reset if you roll a Roth 401(k) into a Roth IRA. If you opened a Roth IRA in 2019, any Roth 401(k) you roll over in 2024 counts as having satisfied the five-year requirement.

What happens if you do not have enough withheld

If your employer withholds 20% but you owe more tax than that, you will owe the difference when you file your return. You can pay it then, or you can ask the IRS to set up a payment plan if the amount is large. The IRS charges interest on unpaid taxes, and if you owe a significant amount, you may also owe a penalty for underpayment.

You can avoid this by asking your plan to withhold more than 20% when you request the withdrawal. You can also make estimated tax payments to the IRS during the year if you know a large withdrawal is coming. Some people choose to have their plan withhold 37% or more if they expect to be in a high tax bracket.

If you roll the withdrawal into another retirement account instead of taking it as a distribution, no withholding happens and no tax is due. You have 60 days to complete a rollover, and you can do this only once per year per account type.

State income tax on 401(k) withdrawals

In addition to federal income tax, most states tax 401(k) withdrawals as ordinary income. The amount varies by state. Some states, such as Florida, Texas, and Wyoming, do not have a state income tax, so you owe nothing to the state. Others, such as California and New York, tax withdrawals at rates up to 13% or more.

Your 401(k) plan may withhold state tax if you request it, but many plans do not offer this option. If your plan does not withhold state tax, you may owe it when you file your state return. Some people who move to a state with no income tax after they retire can avoid state tax on withdrawals taken after the move, but the rules vary by state and depend on when you establish residency.

Frequently Asked Questions

Can I avoid the 20% withholding?

You cannot avoid withholding on a direct withdrawal. However, you can avoid it entirely by rolling the money into an IRA or another 401(k) within 60 days. A rollover is not a withdrawal — no tax or withholding applies. You must complete the rollover yourself; if your plan sends the check to you, the 20% withholding still applies even if you roll it over later.

What if I withdraw from my 401(k) and then roll it back within 60 days?

The 20% that was withheld goes to the IRS, not back into your account. If you roll over the remaining 80%, you still owe income tax on the full 100% when you file your return. You will get a refund for the 20% that was withheld, but only if your total tax liability is less than that amount. This is why a direct rollover (where the plan sends the money to another plan or IRA, not to you) is usually better.

Does the 10% penalty explore to the amount I withdraw or my whole balance?

The penalty applies only to the amount you withdraw. If you have a $100,000 balance and withdraw $10,000 before age 59½, the penalty is 10% of $10,000, which is $1,000. The remaining $90,000 stays in the account and is not penalized.

What if I take a withdrawal and then get rehired by the same company?

The withdrawal is still taxable and subject to withholding. You cannot undo it by returning to the job. However, some plans allow you to repay a withdrawal within a certain time frame and restore the money to the account — check your plan documents or ask your HR department if this option exists.

Are required minimum distributions taxed the same way as regular withdrawals?

Yes. Once you turn 73, the IRS requires you to withdraw a minimum amount each year from a traditional 401(k). That amount is taxed as ordinary income, just like any other withdrawal. If you do not take the required amount, you owe a 25% penalty on the shortfall (or 10% if you correct it within two years).