What you owe in taxes depends on your age, how long the money has been in the account, and whether you contributed pre-tax or after-tax dollars

A 401(k) withdrawal is taxed as ordinary income in the year you withdraw it. The exact amount you owe depends on three things: whether the money came from pre-tax contributions (the most common case), whether you are over 59½, and your total income that year. The IRS withholds a percentage automatically unless you tell them not to, but that withholding is an estimate — you may owe more or get a refund when you file your tax return.

If you withdraw before age 59½, you typically owe both income tax and a 10 percent early withdrawal penalty on the pre-tax portion. If you are 59½ or older, you owe income tax only, with no penalty. Money you contributed after taxes (called a Roth 401(k)) follows different rules: you can withdraw your own contributions tax-free at any age, but earnings are taxed and penalized if withdrawn before 59½.

Key Takeaways

  • Pre-tax 401(k) withdrawals are taxed as ordinary income at your regular tax rate, not a special rate.
  • Withdrawals before age 59½ trigger a 10 percent penalty on top of income tax, unless an exception applies.
  • The IRS withholds roughly 20 percent of the withdrawal automatically, but this is not your final tax bill.
  • Roth 401(k) contributions can be withdrawn tax-free at any age, but earnings and growth are taxed if you withdraw before 59½.
  • Your total income for the year, including the withdrawal, determines your tax bracket and how much you owe.

How withholding works and why it is not your final bill

When you request a 401(k) withdrawal, your plan administrator withholds money for taxes before sending you the rest. For most withdrawals, the withholding rate is 20 percent of the amount you withdraw. If you withdraw $10,000, you receive $8,000 and the plan sends $2,000 to the IRS.

That 20 percent is a placeholder, not your actual tax bill. Your real tax depends on your income bracket. If you are in the 22 percent bracket, 20 percent withholding leaves you short by 2 percent. If you are in the 12 percent bracket, you overpaid and will get a refund. You find out the true amount when you file your tax return in April.

You can request a different withholding rate by filling out a Form W-4P with your plan administrator, but most people do not. If you know you will owe more than 20 percent, you can ask the plan to withhold extra. If you know you will owe less, you can ask for less withholding — though this means you may owe money in April.

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

If you are under 59½ and withdraw from a traditional 401(k), you owe a 10 percent penalty on the pre-tax amount, in addition to income tax. On a $10,000 withdrawal, that is $1,000 in penalty alone. The penalty is calculated on the full amount withdrawn, not on what you receive after withholding.

Some situations are exempt from the 10 percent penalty, though you still owe income tax. These include: withdrawals due to disability, withdrawals made after you separate from service at age 55 or older, withdrawals to pay for a may have access to medical expense that exceeds 7.5 percent of your adjusted gross income, and withdrawals under a Substantially Equal Periodic Payment (SEPP) plan, which requires you to take the same amount every year for five years or until age 59½, whichever is longer.

Hardship withdrawals — money taken for immediate financial need like medical bills or eviction — are not exempt from the penalty. You owe both income tax and the 10 percent penalty on hardship withdrawals before 59½, even though the plan may have allowed you to take the money.

Roth 401(k) withdrawals and the ordering rule

A Roth 401(k) is funded with after-tax dollars. You can withdraw your own contributions at any age with no tax or penalty. Earnings (the growth on your money) are taxed and penalized if withdrawn before age 59½ and before the account has been open for five years.

The IRS uses an ordering rule: when you withdraw from a Roth 401(k), contributions come out first, then earnings. If you withdraw $15,000 and your account holds $10,000 in contributions and $8,000 in earnings, the first $10,000 is tax-free. The remaining $5,000 comes from earnings and is taxed as ordinary income plus the 10 percent penalty if you are under 59½.

This is different from a Roth IRA, where you can withdraw contributions tax-free at any age and the five-year rule applies only to earnings. Roth 401(k)s have stricter rules, but the contribution-first ordering means you can always access your own money without tax.

How your tax bracket affects what you actually owe

Your 401(k) withdrawal is added to all your other income for the year — wages, Social Security, interest, capital gains — and taxed at your marginal rate. If you earn $50,000 in wages and withdraw $20,000 from your 401(k), your taxable income is $70,000. You pay tax on that full amount at the rates that apply to $70,000 of income.

This matters because a large withdrawal can push you into a higher tax bracket. If you are single and earn $45,000 in wages, you are in the 12 percent bracket (as of 2024). A $20,000 withdrawal moves you to $65,000, which is still 12 percent for most of it, but the last portion enters the 22 percent bracket. You do not pay 22 percent on the whole withdrawal, only on the income above the bracket threshold.

Some people split large withdrawals across two years to stay in a lower bracket. Others withdraw in a year when their income is already low — for example, after retiring but before claiming Social Security. Your tax return shows the exact calculation, and a tax professional can model different withdrawal amounts to show you the cost of each option.

State income tax on 401(k) withdrawals

Federal withholding is separate from state withholding. Some states tax 401(k) withdrawals as ordinary income. Others do not tax retirement income at all. A few tax only part of it or have special rules for people over a certain age.

When you request a withdrawal, your plan administrator withholds federal tax automatically. State withholding is optional — you have to request it on a separate form, usually a state W-4P. If you do not request state withholding and your state taxes retirement income, you may owe state tax in April. If you live in a state with no income tax (like Florida, Texas, or Wyoming), you owe no state tax on the withdrawal.

Check your state's tax agency website or ask your plan administrator which states require withholding and what form to use. This is especially important if you move states after retiring or if you withdraw while living in one state and move to another.

Required Minimum Distributions and their tax treatment

Once you reach age 73 (as of 2023), the IRS requires you to withdraw a minimum amount from your traditional 401(k) each year. This is called a Required Minimum Distribution (RMD). The amount is calculated by dividing your account balance by a life expectancy factor published by the IRS. If you do not take the RMD, you owe a 25 percent penalty on the amount you should have withdrawn (reduced to 10 percent if you correct it within two years).

RMDs are taxed as ordinary income, just like any other withdrawal. The 20 percent withholding applies unless you request a different amount. Roth 401(k)s are subject to RMDs during the account owner's lifetime, but Roth IRAs are not — this is another key difference between the two account types.

If you are still working and do not own more than 5 percent of the company, you may be able to delay RMDs until you actually retire. Ask your plan administrator whether the "still-working exception" applies to your situation.

Frequently Asked Questions

Can I avoid the 10 percent penalty by rolling my 401(k) into an IRA?

A rollover does not avoid the penalty if you are under 59½. However, once the money is in a traditional IRA, you can use a SEPP plan to take equal payments without penalty. This requires taking the same amount every year for five years or until age 59½, whichever is longer. The IRS has three methods to calculate the payment amount.

What happens if I do not have enough withheld and owe money in April?

You pay the balance due when you file your tax return. If you owe a large amount, the IRS may charge interest and an underpayment penalty. You can avoid this by requesting extra withholding on future withdrawals or making estimated tax payments throughout the year.

Do I have to report the withdrawal on my tax return if withholding covered my tax bill?

Yes. You report the full withdrawal amount on your tax return even if withholding covered all the tax. Your plan sends you a Form 1099-R showing the withdrawal and withholding, and you report both on your return. The IRS matches the 1099-R to your return automatically.

Is a 401(k) withdrawal considered income for Social Security taxation?

Yes. A large withdrawal can increase your "combined income" for Social Security purposes, which may cause up to 85 percent of your Social Security benefits to be taxed. Combined income includes adjusted gross income plus non-taxable interest plus half of Social Security benefits. This is a common surprise for people who withdraw from retirement accounts while claiming Social Security.

What if I withdraw money by mistake — can I put it back?

You can roll the money back into the 401(k) within 60 days of receiving it, and the withdrawal will not be taxed. This is called a 60-day rollover. If you miss the 60-day window, the withdrawal is taxed and you cannot undo it. Some plans allow one rollover per year; check your plan documents or ask your administrator.