Can I Cash Out My 401(k) at Age 65? Taxes, Withholding, Medicare

You can cash out your 401(k) at 65 without the 10% early-withdrawal penalty, which drops away at 59½.¹ The penalty isn’t the problem. Income tax is. A lump sum lands on top of everything else you earn this year, and the pileup can push you into a higher federal bracket, add a Medicare premium surcharge two years from now, and make more of your Social Security taxable. Whether that trade makes sense depends on how much you’re pulling, when you stopped working, and what the money is for.

Whether You Can Actually Take It at 65

If you’ve already left the employer that sponsors the plan, your full vested balance is available. The plan has to offer a distribution path once you’ve separated from service, and at 65 no age-based penalty applies.²

Still working at the sponsoring employer? Then it depends on your plan’s terms. Many plans set a Normal Retirement Age of 65 and allow an in-service distribution, letting you pull money out while still on the payroll. Not all do. The Summary Plan Description tells you whether your employer adopted that option. If it didn’t, you’ll need to leave the job first or wait until whatever retirement age the plan names.

Federal Tax on the Withdrawal

Every dollar from a traditional 401(k) is ordinary taxable income the year you receive it.³ No capital-gains rate. No retiree discount. It stacks on your Social Security, part-time wages, pension, and investment income, and the total decides your bracket.

For 2026, single-filer federal brackets run:⁴

10% up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Married filing jointly, the thresholds are roughly double: $24,800 for the 10% band, $100,800 for 12%, and up to $768,700 for 37%.⁴

Here’s how the pileup works. You’re single, with $30,000 in Social Security and pension income, and you cash out $200,000. Taxable income before deductions is now $230,000, and the top of that withdrawal is being taxed at 32%. Spreading the same money over several years could have kept you in the 12% or 22% band the whole way through.

The 20% That’s Withheld Before You See a Dollar

When the plan sends the money directly to you instead of rolling it into another retirement account, the administrator has to withhold 20% for federal tax up front.⁵ On a $100,000 distribution, you receive $80,000. You can’t elect a lower rate on an eligible rollover distribution paid to you. Twenty percent is the floor.

That withholding is a prepayment, not a settlement. If the withdrawal pushes you into the 24% or 32% bracket, you’ll owe more when you file. If it turns out to be more than you owe, you get the difference back as a refund. You can also ask the administrator to withhold more than 20% on the distribution form, which is often the cleanest way to avoid an April surprise.

One trap worth knowing. If you take the check and then decide within 60 days to roll it into an IRA, you can do that.⁶ But the plan already sent 20% to the IRS. To roll over the full original balance, you have to come up with that 20% out of pocket and deposit it into the IRA yourself. Whatever you don’t roll over is taxed.

State Tax Adds Another Layer

Most states tax 401(k) distributions as ordinary income, with top rates from under 3% to over 13%. Around a dozen states don’t tax retirement plan distributions at all, either because they have no income tax or because they exempt retirement income specifically. A few offer partial exemptions for retirees over 65. Some cities and counties add their own income tax on top. Federal, state, and local combined can easily take more than 30% of a large cash-out depending on where you live.

What a Big Withdrawal Does to Your Medicare Premiums

This is the cost people don’t see coming. At 65 you’re likely on Medicare or enrolling in it, and Part B and Part D premiums include an Income-Related Monthly Adjustment Amount, or IRMAA, tied to your modified adjusted gross income from two years earlier. A cash-out in 2026 shows up on your 2026 return and sets your 2028 premiums.

For 2026, IRMAA surcharges on Part B start when income tops $109,000 for individuals or $218,000 for joint filers. The smallest surcharge adds $81.20 a month to Part B; at the top tier ($500,000 individual, $750,000 joint) it reaches $487.00 a month. Part D carries its own surcharge on the same brackets, from $14.50 to $91.00 a month.⁷

A single filer with $80,000 in normal income who takes a $150,000 cash-out lands at $230,000 for the year, more than double the IRMAA threshold, and can pay over $1,100 extra in premiums when the surcharge hits. If you recently stopped working, you can ask Social Security to use your current lower income instead by filing Form SSA-44 and citing work stoppage as a life-changing event.⁸ The cash-out itself is not a life-changing event. Only the retirement or work reduction is.

More of Your Social Security Becomes Taxable

If you’re collecting benefits, a large withdrawal can also make more of that Social Security taxable. The IRS uses a “combined income” figure: your adjusted gross income (excluding Social Security), plus nontaxable interest, plus half your benefits.

For single filers, combined income under $25,000 keeps Social Security tax-free. Between $25,000 and $34,000, up to 50% of benefits are taxable. Above $34,000, up to 85% are taxable. For joint filers, the thresholds are $32,000 and $44,000. A six-figure withdrawal almost certainly puts you above the top threshold, meaning 85% of your Social Security is subject to federal income tax that year.

Roth 401(k) Money Works Differently

If part of your 401(k) is a Roth sub-account funded with after-tax dollars, qualified distributions come out tax-free. No federal tax, no state tax, no IRMAA impact, no effect on Social Security taxability. At 65 you’ve cleared the 59½ requirement. The remaining condition is the five-year rule: your first Roth 401(k) contribution has to be at least five years old. Starting Roth contributions in 2020 means eligibility in 2025.

The 20% mandatory withholding generally doesn’t apply to the qualified Roth portion because it isn’t includible in gross income. If you have both traditional and Roth money in the plan, each piece keeps its own tax treatment when you cash out.

Your Spouse Has to Sign Off

Married participants hit an extra step. Federal law requires your spouse’s written consent before you can take a lump sum from most 401(k) plans subject to the qualified joint and survivor annuity rules, and the signature has to be witnessed by a plan representative or a notary.⁹ Without it, the administrator rejects the distribution request. The rule exists to protect a surviving spouse’s right to benefits, and cashing out eliminates that safety net. If your spouse can’t be located, or you aren’t married, you’ll need to establish that with the plan before the money moves.

Cheaper Ways to Get at the Money

A full lump sum in one tax year is the most expensive way to access a 401(k). Two alternatives are worth weighing before you sign the paperwork.

Take It Over Several Years

Most plans allow partial distributions.² Splitting a $300,000 balance into $60,000 a year over five years keeps each year’s income lower and can save tens of thousands in federal tax compared to taking it all at once. If your total income stays under the IRMAA threshold, you also avoid Medicare surcharges entirely.

Roll It to an IRA First

If you don’t need the cash right away, a direct rollover (trustee-to-trustee) into a traditional IRA defers tax and skips the 20% withholding.⁶ From the IRA you can size each year’s withdrawal to your tax situation.

Company Stock and NUA

If the 401(k) holds shares of your employer, a Net Unrealized Appreciation election taxes only the cost basis of the shares as ordinary income at distribution; the appreciation is taxed at long-term capital gains rates when you sell. It requires a lump-sum distribution of the stock as part of a qualifying event and the rules are narrow, but the savings on highly appreciated shares can be large.

You Give Up Creditor Protection

Money inside a 401(k) has some of the strongest creditor protection in federal law. ERISA’s anti-alienation rule keeps most creditors from reaching it: no garnishment, no levy, no seizure in most cases.¹⁰ The moment the money lands in a personal bank account, that shield is gone. It becomes an ordinary asset that judgment creditors and bankruptcy trustees may reach under state law. If a lawsuit, divorce, or major debt is in the picture, this matters. Rolling to an IRA keeps some protection, but the level depends on your state and is generally weaker than ERISA’s.

How to Actually Request the Money

Start with the plan administrator, usually the recordkeeper your employer uses or a firm like Fidelity, Vanguard, or Schwab. Most offer distribution requests through an online portal; some still use paper forms.

You’ll need your plan number and vested balance, and you’ll be asked whether you want the full balance or a partial amount, a lump sum or installments, and what tax withholding you want beyond the 20% federal floor. If you want extra withheld to cover state tax or to avoid an underpayment penalty, that’s where you say so. Funds usually arrive within a few business days to a couple of weeks; direct deposit is faster than a mailed check. After year-end, the administrator sends Form 1099-R showing the distribution and taxes withheld, which you’ll use to file your return.¹¹

Don’t Get Hit With an Underpayment Penalty

If the 20% withheld falls short of your actual bill and you don’t cover the gap during the year, the IRS can charge an underpayment penalty. You’re safe if you owe less than $1,000 after all withholding and credits, or if your total payments cover at least 90% of your current-year tax or 100% of last year’s, whichever is lower.¹²

The simplest fix on a large cash-out is to have the plan withhold more than 20% on the distribution form itself. If the money is already out, make a quarterly estimated payment on Form 1040-ES or pay through IRS Direct Pay. Getting that piece right is the difference between a smooth April and a bill you weren’t expecting.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
3
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
6
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
7
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
8
U.S. Department of Health and Human Services. Medicare Part B Premium Appeals
9
Office of the Law Revision Counsel. 26 USC 417 – Definitions and Special Rules for Purposes of Minimum Survivor Annuity Requirements
10
eCFR. 26 CFR 1.401(a)-13 – Assignment or Alienation of Benefits
11
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.
12
Internal Revenue Service. Estimated Taxes