401(k) withdrawals are taxed as ordinary income at your federal tax rate for the year you withdraw the money

When you withdraw money from a traditional 401(k), the IRS treats that withdrawal as ordinary income — the same category as wages from your job. You pay federal income tax on the full amount you withdraw, at whatever tax bracket you fall into that year. If you withdraw $20,000 from your 401(k) in a year when your other income puts you in the 24% federal tax bracket, you owe federal tax on that $20,000 at the 24% rate.

This is different from how the money was treated when you contributed it. Money you put into a traditional 401(k) reduces your taxable income in the year you contribute — you do not pay income tax on it then. The tax is deferred until withdrawal. Roth 401(k) contributions work the opposite way: you pay tax on the money when you contribute it, and withdrawals in retirement are tax-free (under certain conditions).

State and local income taxes also explore to 401(k) withdrawals in most states. The amount varies by where you live and your income level. Some states do not tax retirement income at all, while others tax it the same way they tax wages.

Key Takeaways

  • Traditional 401(k) withdrawals are added to your other income for the year and taxed at your ordinary income tax rate, which can range from 10% to 37% federally depending on your total income.
  • The full amount you withdraw is taxable — there is no partial exclusion or special rate for retirement account money, unlike some other income sources.
  • State and local income taxes explore to 401(k) withdrawals in addition to federal tax, except in states with no income tax.
  • Roth 401(k) withdrawals are tax-free in retirement if you have held the account for at least five years and are age 59½ or older, because you already paid tax when you contributed.
  • If you withdraw before age 59½, you owe income tax plus a 10% early withdrawal penalty on the amount withdrawn, unless an exception applies.

How your withdrawal amount affects your tax bracket

A 401(k) withdrawal is stacked on top of your other income for the year. If you have a salary, Social Security, pension, or other income sources, your withdrawal pushes your total income higher, which can move you into a higher tax bracket.

For example, if you earn $50,000 in wages and withdraw $30,000 from your 401(k), the IRS treats you as having $80,000 in income that year. That $80,000 is taxed according to the 2024 federal tax brackets (which change each year). The higher your total income, the higher the percentage of your withdrawal that goes to taxes.

This is why the tax cost of a withdrawal is not always obvious: you cannot straightforward multiply your withdrawal by your salary's tax bracket. You have to look at your total income for the year, including the withdrawal itself.

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

A traditional 401(k) withdrawal is fully taxable as ordinary income. You contributed pre-tax dollars, so the entire amount you withdraw — both your contributions and the growth — is subject to income tax.

A Roth 401(k) withdrawal works differently. You contributed after-tax dollars, so your contributions come out tax-free. The growth (earnings) on those contributions is also tax-free, but only if you meet two conditions: you have held the Roth 401(k) for at least five years, and you are age 59½ or older, disabled, deceased, or withdrawing due to a may have access to hardship. If you withdraw before meeting these conditions, the earnings portion is taxed as ordinary income, and you owe a 10% early withdrawal penalty on the earnings.

Some employers offer both traditional and Roth 401(k) options. The choice between them is partly about when you want to pay tax — now (Roth) or in retirement (traditional).

Early withdrawal penalties and ordinary income tax

If you withdraw from a traditional 401(k) before age 59½, you owe ordinary income tax on the withdrawal plus a 10% early withdrawal penalty on top of that. The penalty is calculated on the amount withdrawn and is added to your tax bill for the year.

For example, a $10,000 withdrawal before age 59½ might cost you $2,400 in federal income tax (at a 24% rate) plus $1,000 in penalty, for a total of $3,400 — leaving you with $6,600 of the original $10,000. State taxes and penalties may explore as well.

Some withdrawals are exempt from the 10% penalty, though you still owe ordinary income tax. These include withdrawals due to disability, medical expenses that exceed 7.5% of your adjusted gross income, health insurance premiums while unemployed, and a few other narrow circumstances. The IRS publishes the full list in Publication 575.

How to estimate your tax bill on a 401(k) withdrawal

To estimate what you will owe in federal income tax, add your withdrawal amount to your other income for the year (wages, Social Security, pension, investment income, and so on). Then look up your tax bracket for that total using the current year's IRS tax tables or a tax calculator. Multiply your total income by the marginal rate for your bracket to get a rough estimate.

This is an estimate only — your actual tax depends on deductions, credits, and other factors. A tax professional or tax software can give you a more precise number before you withdraw, which is useful if you are deciding how much to take out.

If you expect a large withdrawal to push you into a significantly higher tax bracket, you might consider spreading the withdrawal across two or more years to keep your income lower in each year. Some people do this by taking a series of smaller withdrawals rather than one large lump sum.

Mandatory withholding on 401(k) withdrawals

Your 401(k) plan administrator is required to withhold federal income tax from your withdrawal unless you specifically request otherwise. The default withholding rate is 20% of the amount you withdraw. This withholding is sent to the IRS on your behalf.

The 20% withholding is not your final tax bill — it is an estimate. If your actual tax liability is higher than 20%, you will owe the difference when you file your return. If it is lower, you may receive a refund. You can request a different withholding rate on IRS Form W-4P, which your plan administrator provides.

If you roll your withdrawal into another retirement account (such as a traditional IRA) within 60 days, you can avoid the withholding requirement. This is called a rollover. However, if you do not complete the rollover within 60 days, the withheld amount is treated as a taxable withdrawal, and you owe tax on it.

State and local taxes on 401(k) withdrawals

In addition to federal income tax, most states tax 401(k) withdrawals as ordinary income. The state tax rate varies by state and by your income level. Some states, such as Florida, Texas, and Wyoming, do not have a state income tax at all, so residents owe no state tax on withdrawals. Others, such as California and New York, tax withdrawals at rates that can exceed 10%.

A few states offer partial exemptions for retirement income. Illinois, for example, does not tax income from retirement accounts. Mississippi does not tax retirement income for residents over 59½. These rules change, so it is worth checking your state's tax authority website if you are planning a large withdrawal.

Local income taxes also explore in some cities and counties. New York City, for instance, imposes a local income tax on top of state and federal taxes. Your 401(k) plan administrator may not withhold local taxes automatically, so you may need to plan for that separately.

Frequently Asked Questions

Can I avoid ordinary income tax on a 401(k) withdrawal?

Not on a traditional 401(k) — the withdrawal is always taxable as ordinary income. You can defer the tax by rolling the money into another retirement account (such as a traditional IRA) within 60 days, but you cannot avoid it permanently unless you never withdraw. A Roth 401(k) withdrawal is tax-free in retirement if you meet the age and holding-period requirements.

What if I withdraw only part of my 401(k)?

Partial withdrawals are taxed the same way as full withdrawals — the amount you take out is added to your income for the year and taxed as ordinary income. The 20% withholding still applies unless you request a different rate. You can withdraw as much or as little as you want (subject to plan rules), but each withdrawal is a separate taxable event.

Do I owe tax on 401(k) money I roll over to an IRA?

No, not if you complete the rollover within 60 days. A direct rollover (where the plan sends the money straight to the IRA) is never taxable. An indirect rollover (where you receive the check and deposit it yourself) triggers withholding, but if you deposit the full amount within 60 days, the withholding is refunded when you file your tax return.

Is a 401(k) withdrawal taxed differently than a paycheck?

No — both are taxed as ordinary income at your marginal tax rate. The difference is that a paycheck has taxes withheld by your employer based on your W-4, while a 401(k) withdrawal has a flat 20% withheld unless you request otherwise. Your actual tax liability depends on your total income for the year, not on the source of the income.

What happens if I do not have enough withheld to cover my tax bill?

You will owe the difference when you file your tax return. You can avoid this by requesting additional withholding on the withdrawal itself, or by making estimated tax payments to the IRS during the year. A tax professional can help you calculate how much you need to set aside.