Yes, you generally do pay taxes on 401k withdrawals. Money coming out of a traditional 401k is taxed as ordinary income at your federal rate, and if you’re under 59½ the IRS usually adds a 10% early withdrawal penalty on top. Roth 401k withdrawals work differently and can come out entirely tax-free when you meet two specific requirements. What you actually owe depends on the type of account, your age, and how you take the money out.
Traditional 401k Withdrawals Are Taxed as Ordinary Income
Every dollar you pull from a traditional 401k counts as ordinary income on your federal return. The IRS treats these distributions the same way it treats wages: the money stacks on top of whatever else you earned that year, and the combined total determines your bracket.1Internal Revenue Service. Retirement Topics – Tax on Normal Distributions For 2026, federal brackets run from 10% on the first $12,400 of taxable income (single filers) up to 37% on income above $640,600.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Because contributions went in before tax, neither your original money nor the growth has ever been taxed. The entire withdrawal is taxable, including every dollar of investment earnings the account produced over the years. That’s different from a regular brokerage account, where long-term gains can qualify for lower capital gains rates. With a traditional 401k, the IRS doesn’t care whether the money came from your own contributions or decades of compounded growth. It all gets taxed at your ordinary income rate.
Roth 401k Withdrawals Can Be Tax-Free
Roth 401k contributions are made with after-tax dollars, so income tax was already paid on the money before it went into the account. The payoff comes on the back end: if your withdrawal qualifies, the entire amount, including all the investment growth, comes out federal-tax-free.
A distribution qualifies for that tax-free treatment when two conditions are both met. The account must have been open for at least five tax years, counted from January 1 of the year you made your first Roth 401k contribution. And you must be at least 59½, permanently disabled, or the distribution must be paid to a beneficiary after your death.3Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
Take money out before meeting both requirements and the distribution is non-qualified. The IRS splits it proportionally between your contributions (never taxed again) and your earnings (taxable). If earnings make up 20% of your total Roth 401k balance, then 20% of each non-qualified withdrawal counts as taxable income. The taxable portion may also get hit with the 10% early withdrawal penalty if you’re under 59½.4Internal Revenue Service. Retirement Topics – Designated Roth Account
The 10% Early Withdrawal Penalty
Taking money from a 401k before age 59½ triggers a 10% additional tax on the taxable portion of the distribution.5Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts This isn’t a substitute for regular income tax. It’s stacked on top. Someone in the 22% bracket who takes an early $20,000 distribution effectively loses 32% to the federal government before state tax even enters the picture.
The penalty exists to keep retirement money invested until retirement. Life doesn’t always cooperate, though, and the tax code carves out several exceptions.
Exceptions That Waive the 10% Penalty
The situations below let you withdraw before 59½ without owing the extra 10%. Regular income tax still applies; only the additional 10% is waived.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Rule of 55. If you leave your job during or after the calendar year you turn 55, you can withdraw from that employer’s 401k without the penalty. Public safety employees get the same treatment starting at age 50. It only applies to the plan at the employer you separated from, not to old 401k accounts from previous jobs.
- Substantially equal periodic payments (SEPP). You commit to a fixed series of withdrawals based on your life expectancy, using one of three IRS-approved calculation methods. Payments must continue for at least five years or until you reach 59½, whichever is later. Change the payment amount before that window closes and the IRS retroactively applies the 10% penalty to every distribution you took. For 401k plans, you must have separated from service before starting SEPP payments.7Internal Revenue Service. Substantially Equal Periodic Payments
- Total and permanent disability. If you become permanently disabled as defined by the IRS, distributions are penalty-free regardless of age.
- Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
- Terminal illness. Under the SECURE 2.0 Act, someone with a physician-certified illness expected to result in death within 84 months can take penalty-free distributions with no dollar cap. The certification must come from an MD or DO.
- Emergency personal expenses. Starting in 2024, you can take up to $1,000 per year penalty-free for unforeseeable emergency expenses. You can’t take another emergency distribution from the same plan for three years unless you repay the first one or make enough new contributions to cover it.8Internal Revenue Service. Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t) Notice 2024-55
- Domestic abuse. Someone who has experienced domestic abuse by a spouse or partner can withdraw up to $10,500 (the 2026 inflation-adjusted limit) or 50% of their vested account balance, whichever is less, within one year of the abuse.9Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs Notice 2025-67
A Hardship Withdrawal Is Not an Exception
This one catches people out constantly. A 401k hardship withdrawal lets you access money while still employed if you face an immediate and heavy financial need, such as avoiding eviction, covering certain medical bills, or paying funeral expenses.10Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions Qualifying for a hardship withdrawal only means your plan allows the distribution. It does not exempt you from the 10% early withdrawal penalty. You owe both regular income tax and the penalty unless a separate exception (like the medical expense threshold) independently applies.
Required Minimum Distributions Force the Tax Eventually
The IRS won’t let money sit in a traditional 401k forever. Starting in the year you turn 73, you must take required minimum distributions (RMDs) each year.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs If you’re still working for the employer sponsoring the plan and you don’t own more than 5% of the business, you can delay RMDs from that particular plan until the year you actually retire.
Your annual RMD is calculated by dividing your account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table. A different table applies if your sole beneficiary is a spouse more than ten years younger.12Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) The distribution is taxed as ordinary income like any other traditional 401k withdrawal.
Missing an RMD is expensive. The IRS imposes a 25% excise tax on the amount you should have withdrawn but didn’t. If you correct the shortfall within two years, the excise tax drops to 10%.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Either way, you still owe income tax on the distribution once you take it. On a $50,000 missed RMD, the 25% penalty alone is $12,500 before income tax.
Mandatory 20% Withholding and the 60-Day Rollover Trap
When you take a distribution paid directly to you rather than transferred to another retirement account, the plan administrator must withhold 20% for federal income tax before cutting the check.13Internal Revenue Service. 401k Resource Guide Plan Participants General Distribution Rules A $50,000 distribution means you receive $40,000 and $10,000 goes to the IRS as an advance payment on your tax bill.
That 20% is a prepayment, not your final tax. If your actual rate is lower, you get the difference back as a refund when you file. If your actual rate is higher, you owe the balance. Withholding does not apply to direct rollovers, where the money moves from one qualified plan to another without you touching it.
The 20% withholding creates a real problem if you receive the check and then decide to roll the money into another retirement account. You have 60 days to complete the rollover.14Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions To avoid tax on the full distribution, you have to deposit the entire original amount, including the 20% that was withheld, into the new account. That means coming up with the withheld portion out of pocket. Using the example above, you’d need to deposit $50,000 into the new account even though you only received $40,000, then recover the extra $10,000 as a tax refund at filing. Miss the 60-day window or deposit only the $40,000 you received, and the IRS treats the shortfall as a taxable distribution, potentially with the 10% early withdrawal penalty if you’re under 59½.
A direct rollover, where the plan sends the money straight to the receiving account, sidesteps this entire problem. No withholding, no 60-day clock, no scrambling to replace missing funds.
State Income Tax Adds Another Layer
Federal tax is only part of the equation. Most states also tax traditional 401k withdrawals as regular income, which can add anywhere from under 3% to over 13% to your bill depending on where you live. A handful of states have no income tax at all and won’t touch your distributions. Others specifically exempt retirement plan income even though they tax wages. Some offer partial exemptions, like excluding a fixed dollar amount of retirement income for residents over a certain age.
The range of state approaches means the total tax burden on the same 401k withdrawal can differ by thousands of dollars depending on your state of residence. Most state tax agency websites spell out the rules clearly, and checking before a large distribution is worth the time.
How the Withdrawal Shows Up on Your Return
Your plan provider reports every 401k distribution on Form 1099-R, which must be sent to you by early February (the standard January 31 deadline shifts to February 2 for the 2026 tax year because the 31st falls on a Saturday).15Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) The key boxes are Box 1 (gross distribution), Box 2a (taxable amount), and Box 4 (federal income tax withheld).16Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
The IRS gets its own copy of every 1099-R and runs automated matching against your return. If the numbers don’t line up, or if you leave the distribution off entirely, expect a notice. An underpayment caused by failing to report the income can trigger a 20% accuracy-related penalty on top of the tax owed.17Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
If you owe the 10% early withdrawal penalty, you report it separately on Form 5329 and attach it to your return. The same form is used to claim an exception to the penalty or report a missed RMD. Getting Form 5329 right matters because the IRS won’t automatically know you qualified for an exception, and without the form, they’ll assume you owe the full penalty.