The tax rate depends on your age, how long you've held the account, and whether you withdraw before retirement
A 401(k) withdrawal is taxed as ordinary income at your regular tax rate — the same rate you pay on your salary. If you withdraw money before age 59½, you also owe a 10 percent penalty on top of that income tax, unless an exception applies. The total tax bill can range from roughly 22 percent to 37 percent or higher, depending on your tax bracket and whether the penalty kicks in.
The amount you owe is not the same for everyone. It depends on three things: your current income, your age when you withdraw, and whether your 401(k) holds pre-tax contributions (the most common type) or Roth contributions. A withdrawal at 62 costs less in penalties than one at 45, and a withdrawal when you earn $30,000 a year costs less in income tax than one when you earn $120,000.
Key Takeaways
- Withdrawals from a traditional 401(k) are taxed as ordinary income at your full tax rate, which ranges from 10 percent to 37 percent depending on your income.
- If you withdraw before age 59½, you owe an additional 10 percent penalty on the amount withdrawn, unless you meet a specific exception like disability or a hardship withdrawal.
- Roth 401(k) withdrawals of contributions are tax-free, but earnings are taxed as ordinary income plus the 10 percent penalty if you withdraw before 59½ and the account is less than five years old.
- Your employer withholds taxes from the withdrawal automatically, but the amount withheld may not cover what you actually owe when you file your tax return.
- Some withdrawals, such as those for medical expenses exceeding 7.5 percent of your income or due to disability, may avoid the 10 percent penalty but still owe income tax.
How ordinary income tax works on 401(k) withdrawals
When you withdraw money from a traditional 401(k), the IRS treats it as income you earned that year. Your withdrawal gets added to your other income — wages, interest, rental income — and taxed at your marginal tax rate, which is the rate that applies to your highest dollars of income.
In 2024, the federal tax brackets for single filers range from 10 percent on the first $11,600 of income to 37 percent on income above $578,100. If you withdraw $20,000 from your 401(k) and your other income puts you in the 24 percent bracket, that $20,000 is taxed at 24 percent, costing you $4,800 in federal income tax alone. State income tax, where it applies, adds more on top.
Your employer is required to withhold taxes from the withdrawal before sending you the money. The standard withholding rate is 20 percent for lump-sum distributions. If you withdraw $20,000, your employer sends you $16,000 and withholds $4,000 for the IRS. But if your actual tax bill is $4,800, you still owe $800 when you file your return — the withholding was not enough.
The 10 percent early withdrawal penalty and when it does not explore
If you are under 59½ and withdraw from your 401(k), you owe a 10 percent penalty on top of income tax. A $20,000 withdrawal costs you $2,000 in penalty alone. This penalty exists to discourage people from raiding their retirement savings early.
The penalty does not explore if you meet one of the IRS exceptions. The most common are disability, death (your beneficiary can withdraw penalty-free), and a hardship withdrawal for when ready and heavy financial need — medical bills, mortgage payments to avoid foreclosure, tuition, or funeral expenses. Even with a hardship exception, you still owe income tax; the penalty is waived.
Other exceptions include substantially equal periodic payments (SEPP), which lets you withdraw a calculated amount each year without penalty as long as you follow the formula, and the Rule of 55, which allows penalty-free withdrawals if you left your job in the year you turned 55 or later. Military reservists called to active duty can also withdraw without penalty.
Roth 401(k) withdrawals have different tax rules
A Roth 401(k) works differently from a traditional 401(k). You contribute after-tax dollars, so withdrawals of your contributions are never taxed. Withdrawals of the earnings — the investment gains — are taxed as ordinary income if you withdraw before age 59½ or if the account has been open for less than five years.
If you opened a Roth 401(k) at age 50 and withdraw at age 58, you can take out all your contributions tax-free, but any earnings are taxed as ordinary income plus the 10 percent penalty. If you wait until 59½ and the account is at least five years old, both contributions and earnings come out tax-free.
Many people confuse Roth 401(k)s with Roth IRAs. The rules are similar but not identical. A Roth IRA has no required minimum distributions and more lenient withdrawal rules, while a Roth 401(k) requires distributions starting at 73 and has stricter early-withdrawal penalties.
What happens to your withholding and your tax bill
Your employer withholds 20 percent from a lump-sum 401(k) distribution automatically. If you withdraw $50,000, you receive $40,000 and $10,000 goes to the IRS. But your actual tax liability depends on your total income for the year and your tax bracket.
If the 20 percent withholding covers your actual tax bill, you may get a refund when you file. If it does not — which happens often when a large withdrawal pushes you into a higher bracket — you owe the difference. You can ask your employer to withhold more before the distribution, but most people do not.
If you roll the withdrawal into another retirement account within 60 days, the withholding is treated as a loan and you can get it back. If you do not roll it over, the withheld amount is gone — it counts as your payment toward your tax bill.
How state income tax affects your total bill
Federal income tax is only part of the cost. Most states tax 401(k) withdrawals as ordinary income as well. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax retirement income, but most do.
If you live in California and withdraw $30,000, you owe federal tax at your rate plus California state tax at up to 13.3 percent. If you live in New York and withdraw the same amount, you owe federal tax plus New York state tax at up to 10.9 percent. The combined bill can easily exceed 40 percent of the withdrawal.
Some states offer partial exemptions for retirement income or have lower rates for people over 59½, but these vary widely. Check your state's tax authority website or speak with a tax preparer to understand your state's rules before you withdraw.
Early withdrawal exceptions that avoid the 10 percent penalty
The IRS allows penalty-free withdrawals in specific situations, though income tax still applies. Disability is one: if you are unable to work due to a physical or mental condition expected to last at least 12 months or result in death, you can withdraw without the 10 percent penalty. You must provide medical documentation.
Substantially equal periodic payments (SEPP) let you withdraw a fixed amount each year based on your life expectancy and account balance. Once you start, you must continue for at least five years or until age 59½, whichever is longer. The formula is strict, and breaking it means you owe the penalty retroactively on all prior withdrawals.
Hardship withdrawals cover when ready financial need: unpaid medical bills, mortgage or rent payments to prevent eviction or foreclosure, tuition and education expenses, funeral expenses, or repairs to your primary home after a casualty. Your plan must offer hardship withdrawals — not all do — and you must show the need is genuine and when ready.
Frequently Asked Questions
Can I withdraw from my 401(k) without paying the 10 percent penalty if I am 55?
Yes, if you left your job in the year you turned 55 or later. This is called the Rule of 55. You can withdraw from that employer's 401(k) without the 10 percent penalty, though you still owe income tax. This does not explore to IRAs or to 401(k)s from previous employers unless you rolled them over.
What is the difference between withholding and the actual tax I owe?
Withholding is an estimate your employer sends to the IRS. Your actual tax depends on your total income for the year. If a $40,000 withdrawal plus your salary puts you in a higher tax bracket than your employer expected, you owe more than was withheld. You pay the difference when you file your return.
If I take a hardship withdrawal, do I still owe income tax?
Yes. A hardship withdrawal waives the 10 percent penalty, but you still owe ordinary income tax on the amount withdrawn. Your employer withholds 20 percent, but your actual bill depends on your tax bracket.
Can I avoid taxes by rolling my 401(k) into an IRA?
A direct rollover to a traditional IRA does not trigger taxes or penalties. You move the money from your 401(k) directly to the IRA with no withholding. If you withdraw the money yourself and deposit it within 60 days, the withholding still applies and you must cover the withheld amount from other funds to avoid a taxable distribution.
What happens if I withdraw from my 401(k) while I am still working?
You can withdraw from your current employer's 401(k) only if the plan allows it and you meet the plan's rules — usually age 59½, hardship, or disability. Some plans allow loans instead of withdrawals. Withdrawals are taxed and penalized the same way as if you had left the job.