What You Pay Tax On When You Withdraw From a 401(k)

You owe income tax on money you withdraw from a traditional 401(k), and the IRS treats that withdrawal as ordinary income for the year you take it out. The amount you withdraw gets added to your other income — wages, interest, Social Security — and taxed at your regular income tax rate. If you withdraw $10,000 from your 401(k) in a year when you also earned $50,000 in wages, the IRS sees $60,000 in taxable income for that year.

The tax you owe depends on your total income and your tax bracket, not on how long the money sat in the account. A withdrawal at age 35 and a withdrawal at age 67 are taxed the same way — as current-year income. The difference is whether you also owe an additional penalty, which depends on your age and reason for withdrawing.

If you have a Roth 401(k), the rules are different. You do not owe income tax on withdrawals of money you contributed yourself, only on the earnings that money made. Most people with Roth accounts are not in a position to withdraw before retirement, so this matters mainly if you have both types of accounts or plan far ahead.

Key Takeaways

  • Traditional 401(k) withdrawals are taxed as income at your regular tax rate in the year you withdraw them.
  • Withdrawals before age 59½ usually trigger a 10 percent penalty on top of income tax, with limited exceptions like hardship or disability.
  • Your employer withholds tax from the withdrawal automatically, but the amount withheld may not cover what you actually owe.
  • You can roll a 401(k) into an IRA or another 401(k) without paying tax or penalty if you do it within 60 days.
  • Roth 401(k) withdrawals of your own contributions are tax-free, but earnings are taxed unless you meet age and holding-period rules.

The 10 Percent Early Withdrawal Penalty

If you withdraw money from a traditional 401(k) before you turn 59½, the IRS adds a 10 percent penalty on top of the income tax you owe. This penalty applies to the amount you withdraw, not to your total income. If you withdraw $5,000 at age 45, you pay 10 percent of $5,000 — that is $500 — plus income tax on the full $5,000.

Some situations let you avoid the penalty even if you are under 59½. These include withdrawals for a medical emergency that exceeds 7.5 percent of your adjusted gross income, withdrawals to pay health insurance premiums after you lose your job, withdrawals for a disability, and withdrawals as part of a court-ordered divorce settlement. Hardship withdrawals for things like eviction or foreclosure may also avoid the penalty, depending on your plan's rules. You still owe income tax in all these cases — the penalty is what you escape.

If you leave your job, you can withdraw from your 401(k) without the penalty once you reach age 55 (or 50 if you work in public safety). This is called the Rule of 55. The income tax still applies, but not the 10 percent penalty. This matters most if you retire early and need to live on your 401(k) until you turn 59½.

How Much Tax Your Employer Withholds

When you request a withdrawal, your employer's plan administrator withholds federal income tax automatically. The standard withholding rate is 20 percent of the amount you withdraw. If you take out $10,000, your employer sends you $8,000 and withholds $2,000 for taxes.

That 20 percent is a starting point, not a final bill. Whether you actually owe more or less depends on your total income for the year and your tax bracket. If you are in the 22 percent bracket and withdraw $10,000, you owe $2,200 in tax, but only $2,000 was withheld — you owe another $200 at tax time. If you are in the 12 percent bracket, you owe $1,200, so you overpaid by $800 and get a refund.

You can ask your plan to withhold more than 20 percent if you expect to owe a lot of tax. You cannot ask it to withhold less. If you know you will owe the penalty, tell your employer, because the 20 percent withholding does not cover the 10 percent penalty — that comes out of your pocket at tax time.

Rollovers: Moving Money Without Paying Tax

If you do not want to pay tax on a withdrawal, you can move the money to another retirement account instead. A direct rollover means your 401(k) plan sends the money straight to an IRA or another 401(k) at a different employer. No tax is withheld, and you owe no tax or penalty. This is the cleanest option and the one most plans prefer.

A 60-day rollover means you withdraw the money yourself and have 60 days to deposit it into another retirement account. Your employer withholds 20 percent, so you receive only 80 percent of the balance. If you want to roll over the full amount, you have to cover the 20 percent from your own pocket and deposit it along with the 80 percent you received. If you miss the 60-day important date or do not deposit the full amount, the shortfall is treated as a taxable withdrawal and may trigger the early withdrawal penalty.

Rollovers are useful if you change jobs, retire early, or want to consolidate accounts. They let you move money without triggering a tax bill in the year you move it. The money still grows tax-deferred in the new account, and the same withdrawal rules explore when you eventually take it out.

Taxes on 401(k) Withdrawals After Age 59½

Once you turn 59½, you can withdraw from your 401(k) without the 10 percent penalty. You still owe income tax on the withdrawal, and your employer still withholds 20 percent. The difference is that the penalty does not explore, so your tax bill is lower.

At age 73, the IRS requires you to start taking withdrawals whether you need the money or not. These are called required minimum distributions, or RMDs. The amount is calculated based on your age and your account balance, and you must withdraw it each year. If you do not take the full RMD, you owe a penalty equal to 25 percent of the amount you should have withdrawn but did not (this was 50 percent before 2023, but the rate dropped). You still owe income tax on the RMD itself.

Some plans let you delay RMDs if you are still working and do not own more than 5 percent of the company. This is called the "still-working exception." If your plan offers it, you can keep the money invested and delay withdrawals until you actually retire.

State Income Tax on 401(k) Withdrawals

Federal income tax is not the only tax you may owe. Most states also tax 401(k) withdrawals as income. Your employer's plan withholds only federal tax, so you may owe state tax at tax time. Some states do not tax retirement income at all — including Florida, Texas, Wyoming, and South Dakota — but most do.

If you move to a different state after you retire, the state where you withdraw the money is usually the one that taxes it, not the state where you earned it or where the plan is based. This matters if you retire to a low-tax state or move between states during retirement. You may also owe tax to your former state if you withdraw before you move, depending on when the withdrawal is processed.

Check your state's tax rules before you withdraw, especially if you are planning a move. Some states offer tax breaks for retirement income that others do not, and the difference can be substantial over time.

What Happens If You Do Not Pay the Tax You Owe

If you withdraw money and do not pay the tax bill when it comes due, the IRS charges interest and penalties. Interest accrues daily and compounds, so the longer you wait, the more you owe. The failure-to-pay penalty is usually 0.5 percent of the unpaid tax per month, up to 25 percent total.

If the IRS believes you intentionally did not pay, they can add fraud penalties on top of that. They can also place a lien on your property, garnish your wages, or seize your bank accounts. The best approach is to pay what you owe when you file your tax return, or set up a payment plan with the IRS if you cannot pay in full.

Frequently Asked Questions

Do I have to pay taxes on a 401(k) withdrawal if I roll it over?

No, if you complete a direct rollover to another 401(k) or IRA within 60 days, you owe no tax or penalty. The money moves between accounts without being treated as income. If you do a 60-day rollover yourself, you must deposit the full amount within 60 days to avoid tax on the shortfall.

What if I withdraw from my 401(k) and do not have enough withheld to cover my tax bill?

You will owe the difference when you file your tax return. You can ask your employer to withhold more than 20 percent before you withdraw, or you can make estimated tax payments during the year. If you do not pay by tax day, you owe interest and penalties on the unpaid amount.

Can I withdraw from my 401(k) without paying the early withdrawal penalty?

Yes, if you meet certain conditions: you are age 55 or older and separated from service, you have a disability, you are paying court-ordered support, or you are withdrawing for a may have access to hardship or medical expense. You still owe income tax, but the 10 percent penalty does not explore. Rules vary by plan, so check with your plan administrator about what your plan allows.

Is a Roth 401(k) withdrawal taxed differently?

Withdrawals of money you contributed to a Roth 401(k) are not taxed. Withdrawals of earnings are taxed as income unless you are age 59½ and have held the account for at least five years. Most people do not withdraw from Roth accounts before retirement, so this rule matters mainly for early retirees or people who convert traditional accounts to Roth.

Do I owe taxes on a 401(k) withdrawal if I am retired?

Yes. Retirement status does not change the tax rule — withdrawals from a traditional 401(k) are taxed as income in the year you withdraw them, at your regular tax rate. The difference is that you no longer owe the 10 percent early withdrawal penalty if you are age 59½ or older.