How 401(k) Withdrawals Get Taxed

Most 401(k) distributions are taxed as ordinary income in the year you withdraw them

When you take money out of a traditional 401(k), the IRS treats it as income. You pay federal income tax on the full amount you withdraw at your regular tax rate—the same rate you pay on wages. If your plan is a Roth 401(k), the rules are different: may have access to withdrawals come out tax-free, but non-may have access to ones trigger taxes on the earnings portion.

The tax bill arrives when you file your return for the year you made the withdrawal. Your employer will send you a Form 1099-R showing how much you withdrew and how much is taxable. If you took out $50,000 from a traditional 401(k) and you're in the 24% federal tax bracket, you owe roughly $12,000 in federal income tax on that withdrawal—plus state income tax if your state has one.

The one exception is money you contributed to your 401(k) on an after-tax basis (not the same as a Roth). You can withdraw those contributions tax-free, but the earnings on them are taxable. Your plan administrator can tell you whether your account holds after-tax contributions and how much.

Key Takeaways

• Traditional 401(k) withdrawals are taxed as ordinary income at your full tax rate in the year you take the money out.
• Roth 401(k) withdrawals are tax-free if you are age 59½ or older and the account has been open for at least five tax years; otherwise earnings are taxed.
• Your employer reports the withdrawal on Form 1099-R, and you report it on your tax return; the tax is due when you file.
• Early withdrawals before age 59½ from a traditional 401(k) are subject to a 10% penalty on top of income tax, with limited exceptions.
• State income tax may also apply to your withdrawal depending on where you live and where the plan is administered.

How the tax is calculated and reported

Your employer withholds federal income tax from your distribution at the time you receive it, unless you ask them not to. The withholding is based on IRS tables and assumes you'll have no other income that year—so it may be too much or too little depending on your actual tax situation. You can adjust the withholding by filling out a new Form W-4P and giving it to your plan administrator before you take the distribution.

In January of the following year, your plan administrator sends you a Form 1099-R. This form shows the gross distribution (the full amount), the taxable amount, and how much federal tax was withheld. You report this on your tax return. If too much was withheld, you get a refund; if too little, you owe the difference when you file.

State tax withholding works separately. Some states require it; others don't. A few states don't tax retirement income at all. Check your state's rules or ask your plan administrator what will be withheld from your state.

The 10% early withdrawal penalty and its exceptions

If you withdraw from a traditional 401(k) before you turn 59½, you owe a 10% penalty on top of income tax. A $50,000 withdrawal at age 50 costs you $5,000 in penalty plus the income tax. The penalty applies to the full taxable amount, not just the earnings.

The IRS allows several exceptions where the 10% penalty does not apply, though income tax still does. These include withdrawals for a may have access to disability, withdrawals made as part of a series of substantially equal periodic payments (called a SEPP or 72(t) distribution), withdrawals to pay unreimbursed medical expenses above 7.5% of your adjusted gross income, and withdrawals to pay health insurance premiums after you've lost your job. Some plans also allow loans instead of withdrawals, which avoids the penalty entirely if you repay the loan on schedule.

The exception that catches people off guard is the Rule of 55: if you leave your job in the year you turn 55 or later, you can withdraw from that employer's 401(k) without the 10% penalty (though you still pay income tax). This applies only to the plan at the employer where you separated; it does not apply to IRAs or old 401(k)s from previous jobs.

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

Roth 401(k) contributions come out tax-free at any age. The earnings on those contributions are tax-free only if you are 59½ or older and the account has been open for at least five tax years. If you withdraw before meeting both conditions, you pay income tax on the earnings portion and may owe the 10% early withdrawal penalty.

The five-year clock starts on January 1 of the first year you contributed to a Roth 401(k)—any Roth 401(k), not just the current one. If you opened a Roth 401(k) in 2020 and withdrew in 2024, you've satisfied the five-year requirement. If you rolled a Roth 401(k) into a Roth IRA, the five-year rule for the IRA is separate and starts over.

Unlike a Roth IRA, a Roth 401(k) has required minimum distributions (RMDs) starting at age 73. You must withdraw a calculated amount each year, and those withdrawals are tax-free if the five-year rule is met. If you want to avoid RMDs, you can roll the Roth 401(k) into a Roth IRA before the first RMD is due.

Mandatory withholding and what happens if you don't elect otherwise

If you take a lump-sum distribution (the entire balance at once), your employer must withhold 20% federal income tax automatically, even if you don't ask them to. This is a legal requirement. If you want to avoid this withholding and roll the money into an IRA or another 401(k) instead, you must do a direct rollover: the plan administrator sends the money straight to the new account, and you never touch it. No withholding occurs on a direct rollover.

If you take the money yourself (called an indirect rollover), the 20% withholding is taken out immediately. You then have 60 days to deposit the full original amount—including the withheld 20%—into another retirement account. If you deposit only what you received after withholding, the withheld amount is treated as a taxable distribution and you owe tax on it plus the 10% penalty if you're under 59½.

Periodic distributions (monthly or quarterly payments) are subject to withholding based on your Form W-4P, not the automatic 20%. This gives you more control over how much is withheld.

State income tax on 401(k) withdrawals

Most states tax 401(k) distributions as income, just as the federal government does. A few states—including Pennsylvania, Illinois, and Mississippi—do not tax retirement income, including 401(k) withdrawals. Others tax only withdrawals taken before a certain age or only the portion above a threshold.

If you live in a state that taxes retirement income and you withdraw from your 401(k), you owe state tax on the withdrawal. Your employer may withhold state tax automatically, or you may need to pay it when you file your state return. If you move to a different state after you retire, the state where you lived when you took the withdrawal is generally the one that taxes it, though rules vary.

Some states also have reciprocal agreements with other states, meaning residents of one state who work in another may not owe tax to the work state. Check your state's tax authority website or ask your plan administrator about your specific situation.

Withdrawals after you reach 59½ versus before

Once you turn 59½, you can withdraw from your 401(k) without the 10% early withdrawal penalty. You still owe income tax on the withdrawal, but the penalty is gone. This is true for both traditional and Roth 401(k)s, though Roth earnings are tax-free only if the five-year rule is met.

Before 59½, every withdrawal from a traditional 401(k) triggers the 10% penalty unless an exception applies. The penalty is in addition to income tax, making early withdrawals expensive. A $20,000 withdrawal at age 45 costs you $2,000 in penalty plus income tax at your rate—potentially $6,800 total if you're in the 24% bracket.

At age 73, required minimum distributions begin. You must withdraw a calculated percentage of your balance each year and pay income tax on it. If you don't take the RMD, the IRS charges a 25% penalty on the amount you should have withdrawn (reduced to 10% if you correct it within two years). For Roth 401(k)s, you can avoid RMDs by rolling the balance into a Roth IRA before the first RMD is due.

Frequently Asked Questions

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

No. Your pre-tax 401(k) contributions reduce your taxable income in the year you make them. You pay tax only when you withdraw the money. If you made after-tax contributions (a separate category from Roth), you can withdraw those contributions tax-free, but the earnings are taxed.

What if I roll my 401(k) into an IRA—do I owe taxes?

Not if you do a direct rollover. The plan administrator sends the money straight to the IRA, and no tax is due. If you take the money yourself and deposit it within 60 days, you still owe no tax on the rollover itself, but the 20% withholding is taken out and you must replace it from your own funds to avoid a taxable distribution.

Can I avoid the tax by taking a loan from my 401(k) instead?

Yes. A 401(k) loan is not a distribution, so no tax or penalty applies as long as you repay it on schedule. Most plans allow you to borrow up to 50% of your vested balance, up to $50,000. If you leave your job before repaying the loan, the unpaid balance becomes a taxable distribution and may trigger the 10% penalty.

How much tax will I owe on my withdrawal?

It depends on your total income for the year and your tax bracket. A $50,000 withdrawal is taxed at your marginal rate—the rate on your highest income. If you're in the 22% bracket, you owe roughly $11,000 in federal tax; in the 24% bracket, roughly $12,000. State tax varies by state. Use a tax calculator or speak with a tax professional for your exact situation.

What if my employer withheld too much tax from my distribution?

You get the excess back as a refund when you file your tax return. If too little was withheld, you owe the difference when you file. You can adjust future withholding by submitting a new Form W-4P to your plan administrator before your next distribution.