How Taxes Work on 401(k) Withdrawals Before and After Retirement

What you owe in taxes depends on your age, the type of 401(k), and whether you've already paid taxes on that money

A 401(k) withdrawal is taxed as ordinary income in the year you take it out. The exact amount you owe depends on three things: whether the money came from pre-tax or after-tax contributions, your total income that year, and your age when you withdraw.

If you withdraw before age 59½, you typically owe income tax plus a 10 percent early withdrawal penalty on the amount you take out—unless an exception applies. If you withdraw at 59½ or later, you owe income tax but no penalty. The money is taxed at your regular income tax rate, which means the tax bill depends on your tax bracket that year.

Your employer withholds a percentage of each withdrawal automatically. The standard withholding rate is 20 percent for lump-sum distributions, though you can request a different amount. That withholding is not the final tax bill—it is a prepayment toward what you will owe when you file your tax return.

Key Takeaways

• Withdrawals from a traditional 401(k) are taxed as ordinary income at your regular tax rate, and the IRS withholds 20 percent automatically unless you choose a different amount.
• If you withdraw before age 59½, you owe a 10 percent early withdrawal penalty on top of income tax, unless you meet a specific exception like disability or a Roth conversion.
• Roth 401(k) withdrawals of contributions are never taxed, but earnings are taxed and penalized if you withdraw before age 59½ and the account is less than five years old.
• The tax you owe is calculated when you file your return; withholding is just an estimate, so you may owe more or receive a refund depending on your other income.
• Rolling over a 401(k) to an IRA within 60 days avoids immediate taxation, but the money remains subject to tax when you eventually withdraw it.

How traditional 401(k) withdrawals are taxed

Money you contributed to a traditional 401(k) was deducted from your taxable income when it went in, so the IRS taxes it when it comes out. The withdrawal is added to your other income for the year and taxed at your marginal rate—the tax bracket that applies to your highest dollars of income.

If you earn $50,000 in salary and withdraw $20,000 from your 401(k), the IRS treats you as having $70,000 in income that year. If that $70,000 puts you in the 22 percent federal tax bracket, you owe 22 percent on the withdrawal (plus state income tax if your state has it). Your employer withholds 20 percent, so you will owe an additional 2 percent when you file, or you may owe nothing if your other withholding covers it.

The withholding your employer sends to the IRS is not a final payment—it is a deposit toward your tax bill. When you file your return, the IRS calculates what you actually owe based on your full income and credits. If you withheld too much, you get a refund. If you withheld too little, you owe the difference.

The 10 percent early withdrawal penalty and when it does not apply

If you withdraw from a traditional 401(k) before age 59½, you owe a 10 percent penalty on the amount withdrawn, in addition to income tax. A $30,000 withdrawal at age 45 costs you 10 percent ($3,000) in penalty plus income tax on the full $30,000.

The penalty does not apply if you meet one of these exceptions: you are disabled, you are withdrawing to pay unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income, you are a reservist called to active duty, you are taking substantially equal periodic payments under IRS Rule 72(t), or you are withdrawing after separating from service in the year you turn 55 or later.

The Rule 72(t) exception is the most common workaround for early access. It lets you withdraw a calculated amount each year without penalty, as long as you follow the formula and continue for five years or until age 59½, whichever is longer. The calculation is complex and requires IRS approval, so you should work with a tax professional if you are considering this route.

Roth 401(k) withdrawals and the five-year rule

Roth 401(k) contributions are made with after-tax money, so you never pay income tax on the contributions themselves when you withdraw them. Earnings on those contributions are taxed, however, and subject to the 10 percent penalty if you withdraw before age 59½ and the account has been open less than five years.

The five-year clock starts on January 1 of the year you made your first Roth 401(k) contribution. If you opened a Roth 401(k) in 2020, the five-year period ends on January 1, 2025. After that date, you can withdraw earnings without penalty if you are 59½ or older or meet another exception.

If you withdraw earnings before the five-year period ends and before age 59½, you owe income tax on the earnings plus the 10 percent penalty. Your contributions come out tax-free and penalty-free at any time. The IRS assumes you withdraw contributions first, so you can take out what you put in without tax consequences.

How withholding works and why it is not your final tax bill

Your employer withholds 20 percent of a lump-sum 401(k) distribution and sends it to the IRS. If you take a series of smaller withdrawals, the withholding is calculated differently—usually as if the payment were your only income for the year, which often results in over-withholding.

You can request a different withholding rate by filing Form W-4P with your plan administrator. You might choose to withhold more if you expect to owe taxes from other sources, or less if you have already withheld enough through your job. The form lets you specify a flat dollar amount or a percentage.

The withholding is a prepayment only. When you file your tax return, you report the withdrawal and calculate your actual tax liability. If you withheld $6,000 but owe $5,000, you get a $1,000 refund. If you withheld $4,000 but owe $5,000, you pay the $1,000 difference when you file.

State income tax on 401(k) withdrawals

Most states that have income tax also tax 401(k) withdrawals. The state tax is calculated separately from federal tax and withheld separately. Your employer withholds federal tax and state tax based on the W-4P you file.

Some states do not tax retirement income at all. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only dividend and interest income, not wages or retirement withdrawals. If you move to one of these states after retiring, you may not owe state tax on withdrawals taken after you move, though the rules vary by state and by plan.

If you withdraw while living in a state with income tax and later move to a state without it, you still owe tax to the state where you lived when you withdrew the money. State tax is based on residency at the time of withdrawal, not at the time you file your return.

Rollovers and how they delay taxation

If you roll over your 401(k) to a traditional IRA within 60 days of withdrawal, you avoid immediate taxation. The money moves from your 401(k) to the IRA without being taxed in that year. You still owe tax eventually—when you withdraw from the IRA—but you postpone it and keep the money invested in the meantime.

Your employer must withhold 20 percent of the distribution unless you request a direct rollover, where the money goes straight from the 401(k) plan to the IRA without passing through your hands. A direct rollover avoids the withholding entirely and is the simpler route if you want to move the money without paying tax immediately.

If you miss the 60-day deadline, the withdrawal is taxed as a regular distribution. You owe income tax and the 10 percent penalty if you are under 59½. The 60-day window is strict—the IRS does not grant extensions—so mark the deadline on your calendar if you are planning a rollover.

Frequently Asked Questions

Do I owe taxes on my 401(k) contributions?

You owe taxes on traditional 401(k) contributions when you withdraw them, not when you make them. Roth 401(k) contributions are made with after-tax money, so you never pay income tax on the contributions themselves—only on the earnings they generate.

What happens if I do not have enough withheld?

If your withholding is too low, you will owe the difference when you file your tax return. You may also owe an estimated tax penalty if you underpay by a large amount. You can adjust your withholding on Form W-4P to prevent this in future withdrawals.

Can I avoid the 10 percent penalty by rolling over to an IRA?

A rollover does not avoid the penalty if you have already withdrawn the money. The penalty applies at the time of withdrawal. A direct rollover, where money goes straight to an IRA, avoids both the penalty and immediate taxation.

Does my 401(k) withdrawal count as income for Medicare premiums?

Yes. The IRS uses a calculation called modified adjusted gross income (MAGI) to determine your Medicare Part B and Part D premiums. A large 401(k) withdrawal can increase your MAGI and raise your premiums for the current year and the following year.

What if I withdraw from my 401(k) while 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 or a hardship exception. You owe income tax and the 10 percent penalty if you are under 59½. Withdrawals from a previous employer's 401(k) follow the same tax rules regardless of your current employment status.