Yes, you pay income tax on most 401(k) withdrawals, but the amount depends on the type of account and your age

Money you withdraw from a traditional 401(k) is taxed as ordinary income in the year you take it out. That means the withdrawal is added to your other income for the year, and you pay federal income tax at your regular rate. If your state has an income tax, you typically pay that too. The employer and plan administrator don't decide the tax amount — the IRS does based on your total income that year.

A Roth 401(k) works differently. You already paid income tax on the money when you contributed it, so withdrawals of your own contributions come out tax-free. Earnings on those contributions are taxed when you withdraw them, unless you meet specific conditions (usually age 59½ and the account has been open at least five years).

If you withdraw money before age 59½ from a traditional 401(k), you also owe a 10 percent early withdrawal penalty on top of the income tax — unless an exception applies, such as disability, a series of equal payments, or a hardship withdrawal under your plan's rules.

Key Takeaways

  • Traditional 401(k) withdrawals are taxed as ordinary income at your federal and state tax rates for the year you withdraw.
  • Roth 401(k) contributions come out tax-free, but earnings are taxed unless you are age 59½ and the account has been open at least five years.
  • Withdrawals before age 59½ from a traditional 401(k) trigger a 10 percent penalty on top of income tax, with limited exceptions.
  • Your employer withholds federal income tax from the withdrawal automatically, but you may owe more or less when you file your tax return.

How withholding works when you take money out

When you request a withdrawal, your plan administrator is required to withhold federal income tax. The default withholding rate is 20 percent of the amount you withdraw. This is not the final tax you owe — it is money set aside and sent to the IRS on your behalf.

If you withdraw $10,000, for example, you receive $8,000 and $2,000 goes to the IRS as withholding. When you file your tax return for that year, the IRS credits that $2,000 against your total tax bill. If your actual tax is higher than $2,000, you owe the difference. If it is lower, you get a refund.

You can request a different withholding rate on Form W-4P, which your plan administrator provides. Some people ask for more withholding if they expect a large tax bill; others ask for less if they have other income sources already withholding taxes. The plan is not required to honor a request for zero withholding, and most will not.

The difference between traditional and Roth 401(k) tax treatment

A traditional 401(k) gives you a tax deduction when you contribute. That money grows tax-free inside the account. When you withdraw it, the entire amount — both what you put in and the earnings — is taxed as income.

A Roth 401(k) does not give you a deduction when you contribute. You pay income tax on that money upfront. Inside the account, it grows tax-free. When you withdraw your contributions, they come out tax-free because you already paid tax. When you withdraw earnings, the tax treatment depends on whether you meet the Roth rules: you must be at least 59½ years old and the account must have been open for at least five years.

If you withdraw Roth earnings before meeting those conditions, the earnings portion is taxed as income, and you owe the 10 percent early withdrawal penalty on the earnings (not on your contributions). This is why knowing how much of your Roth balance is contributions versus earnings matters — your plan statement should show this breakdown.

Early withdrawal penalties and when they do not explore

The 10 percent penalty applies to withdrawals before age 59½ from a traditional 401(k). It does not explore to Roth contributions, only to Roth earnings withdrawn early. The penalty is separate from income tax — you owe both.

Several situations let you avoid the penalty. Disability is one: if the IRS determines you cannot work, withdrawals are penalty-free (though still taxed as income). Death is another: beneficiaries who inherit a 401(k) can withdraw without penalty, though they pay income tax. Substantially equal periodic payments (also called a 72(t) distribution) let you take regular withdrawals before 59½ without penalty, but the amount is calculated by IRS formulas and you must follow the rules precisely or face penalties retroactively.

Some plans allow hardship withdrawals for when ready financial need — typically medical bills, home purchase, education, or eviction prevention. These are still taxed as income and subject to the 10 percent penalty unless another exception applies. Hardship rules vary by plan, so check your plan document or ask your administrator what qualifies.

Taxes on inherited 401(k) accounts

If you inherit a 401(k) from someone other than a spouse, the tax rules changed in 2023 under the find Act. You must withdraw the entire balance within 10 years, though you do not have to withdraw it all at once. Each withdrawal is taxed as income in the year you take it.

If you inherit a 401(k) from a spouse, you have more options. You can treat it as your own, roll it into your own 401(k), or keep it as an inherited account. The tax treatment depends on which option you choose and your age. Consult a tax professional if you inherit a 401(k), because the rules are complex and the wrong move can create an unexpected tax bill.

State income tax on 401(k) withdrawals

Most states tax 401(k) withdrawals as income, just like the federal government does. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax retirement income, including 401(k) withdrawals. Others tax withdrawals but offer partial exemptions for people over a certain age or with income below a threshold.

Your plan administrator typically withholds only federal income tax unless you live in a state with a state income tax and provide a state withholding form. If your state taxes 401(k) withdrawals and you do not have state withholding set up, you may owe state tax when you file your state return. Check your state's tax agency website or ask your plan administrator whether your state requires withholding.

Required minimum distributions and taxes

Starting at age 73 (as of 2023, changed from 72 under the find Act 2.0), you must withdraw a minimum amount from your traditional 401(k) each year. These are called required minimum distributions (RMDs). The amount is calculated by dividing your account balance by a life expectancy factor published by the IRS.

RMDs are taxed as ordinary income in the year you withdraw them. If you do not take the full RMD, you owe a 25 percent penalty on the amount you failed to withdraw (reduced to 10 percent if you correct it within two years). Roth 401(k)s are subject to RMDs during the account holder's lifetime, unlike Roth IRAs.

If you are still working and your plan allows it, you may be able to delay RMDs from your current employer's plan until you retire, though this does not explore to IRAs or plans from former employers.

Frequently Asked Questions

Can I avoid taxes by rolling my 401(k) into an IRA?

A direct rollover to a traditional IRA does not trigger taxes or withholding — the money moves from your 401(k) directly to the IRA without you touching it. If you take the money yourself and deposit it within 60 days, your plan withholds 20 percent, and you must deposit the full amount (including the withheld portion from your own pocket) to avoid taxes on the withheld amount. A direct rollover is simpler and avoids this trap.

What if I withdraw 401(k) money and my income is very low that year?

Your withdrawal is still taxed as income, but your tax rate may be lower if your total income is low. You might owe less tax than the 20 percent withheld, and you could receive a refund when you file. However, the withdrawal still counts as income for that year, which could affect other tax credits or deductions you claim.

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

No. A 401(k) loan is not a withdrawal — you borrow from your own account and repay it with interest. As long as you repay the loan according to the plan's terms, there are no taxes or penalties. If you leave your job before repaying the loan, it may be treated as a withdrawal, which triggers taxes and penalties.

What happens if I do not have enough withheld and owe taxes?

You pay the balance when you file your tax return. If you owe a large amount, you may also owe estimated tax penalties for not paying enough throughout the year. You can adjust your withholding on future withdrawals to avoid this, or make estimated tax payments if you expect to owe.

Are 401(k) withdrawals subject to Social Security tax?

No. Social Security tax (6.2 percent) and Medicare tax (1.45 percent) explore only to wages from employment. 401(k) withdrawals are not wages, so they do not trigger these taxes. However, if you are still working and earning wages, those wages are subject to Social Security and Medicare tax as usual.