How Does a 401(k) Withdrawal Affect Your Tax Return?

A withdrawal from a traditional 401(k) lands on your tax return as ordinary income for the year you receive it, and if you’re under 59½ the IRS usually adds a 10% early withdrawal penalty on top. That is the short answer to how a 401(k) withdrawal affects your tax return, but the full picture reaches further: the extra income can push you into a higher federal bracket, shrink credits and deductions tied to your adjusted gross income, raise your Medicare premiums two years later, and make more of your Social Security taxable.¹

The Distribution Is Added to Your Ordinary Income

Traditional 401(k) contributions went in pre-tax, so the IRS collects when the money comes out. The full distribution gets added to your wages and other income for the year and is taxed at your ordinary rate. There is no capital gains treatment, even if the balance grew from stock market gains.²

For tax year 2026, federal brackets for a single filer run as follows:³

10% on income 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 couples filing jointly get wider brackets; the 22% bracket, for example, doesn’t start until $100,801. Because a withdrawal stacks on top of your other income, it can straddle two brackets. Someone earning $90,000 in salary who takes a $30,000 distribution pays 22% on the portion up to $105,700 and 24% on the rest.³

The added income also raises your adjusted gross income, the figure that determines eligibility for the child tax credit, education benefits, ACA marketplace subsidies, and many other items on your return. A distribution that looks manageable on its face can quietly disqualify you from credits you were counting on.

The 10% Early Withdrawal Penalty

If you’re under 59½, the IRS adds a 10% penalty to the taxable portion of the distribution on top of your regular income tax. A $20,000 early withdrawal for someone in the 22% bracket means roughly $4,400 in income tax plus $2,000 in penalty, leaving about $13,600.⁴

A hardship withdrawal does not escape this. Even when your plan permits a distribution for an immediate and serious financial need, the IRS still treats the amount as taxable income and applies the 10% penalty unless a separate exception covers you.⁵

Exceptions That Waive the Penalty

Several exceptions remove the 10% penalty while leaving the distribution itself taxable as ordinary income.⁶

Rule of 55. If you leave your job during or after the year you turn 55, you can take penalty-free withdrawals from that employer’s 401(k). It only applies to the plan at the employer you separated from. Rolling the money into an IRA first forfeits the exception.
Disability. Distributions after you become totally and permanently disabled are penalty-free, with IRS certification that the condition is expected to result in death or last indefinitely.
Qualified domestic relations order. When a divorce decree assigns part of a 401(k) to an ex-spouse, the recipient avoids the 10% penalty on distributions taken directly from the plan.
Substantially equal periodic payments. You can set up a schedule of roughly equal withdrawals based on your life expectancy using one of three IRS-approved methods. Payments must continue for the longer of five years or until you reach 59½, and changing the schedule early triggers a retroactive penalty on everything already paid.⁷
Unreimbursed medical expenses. Withdrawals that pay medical costs above 7.5% of AGI are penalty-free to the extent of that excess, even if you don’t itemize.⁸
Terminal illness. Distributions made after a physician certifies a terminal illness are penalty-free.

SECURE 2.0 added more exceptions for plan years starting after December 31, 2023:

Up to $5,000 per child for a birth or legal adoption, repayable within three years.
Up to the lesser of $10,500 (the 2026 inflation-adjusted figure) or 50% of your vested balance for victims of domestic abuse.⁹
One emergency personal expense withdrawal of up to $1,000 per calendar year, self-certified, repayable within three years.

Each exception removes only the penalty. The money is still taxable income on your return.

When Moving the Money Doesn’t Trigger Tax

Not every movement of 401(k) funds hits your tax return. A direct rollover, where the plan administrator sends your balance straight to another 401(k) or an IRA, generates no taxable income because you never receive the money.¹⁰

If the check is made out to you instead, the plan must withhold 20% for federal tax before releasing it. You then have 60 days to deposit the full original amount, including the 20% that was withheld, into a qualifying retirement account. Miss that window and the entire distribution becomes taxable income, with the 10% penalty added if you’re under 59½.¹⁰

A 401(k) loan is also not a taxable event when it follows the rules. You can borrow up to the lesser of $50,000 or 50% of your vested balance, with repayment generally due within five years and at least quarterly.¹¹ The danger is default. Miss payments or leave your job without repaying, and the outstanding balance becomes a deemed distribution: taxable income, plus the 10% penalty if you’re under 59½.¹²

Roth 401(k) Withdrawals Follow Different Rules

Roth 401(k) contributions were made with after-tax money, so the tax treatment on the way out turns on whether the distribution is “qualified.” A qualified distribution comes out tax-free and penalty-free, earnings included. Both conditions must be met: you’ve reached 59½ (or the distribution is due to disability or death), and at least five tax years have passed since your first Roth 401(k) contribution to the plan. The five-year clock starts on January 1 of the year of your first Roth contribution.¹³

Non-qualified Roth 401(k) distributions get a split treatment that often surprises people. Unlike a Roth IRA, where contributions are considered withdrawn first, a Roth 401(k) treats each non-qualified distribution as a proportional mix of contributions and earnings. If the account is 90% contributions and 10% earnings, each dollar comes out roughly 90 cents tax-free and 10 cents taxable, with the 10% penalty attaching to the taxable slice if you’re under 59½ and no exception applies.¹⁴

How It Shows Up on Your Return

Your plan administrator sends Form 1099-R to you and the IRS for any distribution of $10 or more. It should arrive by early February.¹⁵

Box 1 shows the gross distribution. Box 2a shows the taxable amount, which for a traditional 401(k) usually matches Box 1. Box 4 shows federal tax already withheld, which credits against your total liability. Box 7 carries a code identifying the type of withdrawal:¹⁶

Code 1: early distribution, no known exception.
Code 2: early distribution where the plan already knows an exception applies, such as a QDRO payment.
Code 7: normal distribution after 59½.
Code G: direct rollover; non-taxable.

The gross distribution goes on the pensions and annuities line of Form 1040, and the taxable amount goes on the next line as income. Withholding from Box 4 reduces your tax bill the same way wage withholding does.

If your 1099-R shows Code 1 but you qualify for an exception the plan didn’t know about, use Form 5329 to claim it. This is common with the Rule of 55, the medical expense exception, and the newer SECURE 2.0 provisions. On Form 5329 you report the taxable amount and enter the exception code to remove the 10% penalty from the calculation.¹⁷

Required Minimum Distributions After 73

Starting at age 73, the IRS requires you to withdraw a minimum amount from your traditional 401(k) each year. Your first required minimum distribution is due by April 1 of the year after you turn 73; later ones are due by December 31. Many plans allow you to delay RMDs from your current employer’s plan if you’re still working there.¹⁸

Missing an RMD costs 25% of the amount you should have withdrawn. The penalty drops to 10% if you catch and correct it within two years, and you can request a full waiver by filing Form 5329 with a written explanation showing reasonable error and a corrective step.¹⁹

Each RMD is taxable income like any other traditional 401(k) distribution. Taking your first RMD late, by the April 1 deadline, means a second RMD is also due that same December 31. Doubling up in a single year can push you into a higher bracket.

Ripple Effects on Medicare and Social Security

Medicare Part B and Part D premiums are income-tested. If your modified adjusted gross income exceeds the thresholds, you pay the Income-Related Monthly Adjustment Amount, or IRMAA. For 2026, the surcharge starts at $109,000 for individual filers and $218,000 for married couples filing jointly. MAGI here is adjusted gross income plus tax-exempt interest.²⁰

The timing catches people off guard. IRMAA is based on the tax return from two years earlier, so a large 401(k) withdrawal in 2024 raises your 2026 Medicare premiums. The lowest tier adds $81.20 per month to Part B alone; the highest, at individual MAGI of $500,000 or more, reaches $487 per month.²¹

If you’re already collecting Social Security, a distribution can also make more of your benefits taxable. The IRS uses a combined income formula: adjusted gross income plus nontaxable interest plus half of your Social Security benefits. For single filers, benefits start becoming taxable above $25,000 of combined income, and up to 85% become taxable above $34,000. For joint filers, the thresholds are $32,000 and $44,000. These thresholds have never been indexed for inflation.²²

Qualified Roth 401(k) distributions don’t enter that formula at all.

State Income Tax

Federal is only part of the bill. Most states also tax 401(k) distributions as ordinary income at rates reaching 13.3%. Roughly a dozen states fully exempt retirement plan distributions, either because they levy no income tax or because they specifically exclude retirement income. Several others offer partial exemptions tied to age or amount. State withholding rules vary too: some states require withholding whenever federal tax is withheld, others let you opt out, and states without an income tax don’t withhold. If you moved during the year, the state where you were a legal resident on the distribution date generally has the taxing authority.

Why 20% Withholding Often Isn’t Enough

The 20% mandatory withholding on non-periodic distributions sounds like a lot, but it rarely covers the full bill. In the 24% or 32% bracket you’ll owe more than was withheld, and the 10% penalty may apply on top. State tax adds another layer.¹

The IRS also expects tax to be paid throughout the year. If wage and retirement plan withholding together don’t cover at least 90% of your current year’s liability or 100% of last year’s, you can face an underpayment penalty on top of the tax itself. For a large mid-year withdrawal, you can either ask the plan to withhold more than the default 20% or make quarterly estimated payments to close the gap.²³

Run the numbers before you take the distribution. Add it to your projected income for the year, apply your combined federal and state rate, and layer the 10% penalty on top if it applies. The 20% withheld at the source is a deposit on a bill that is often larger.

1
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
2
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3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. 401(k) Plan Hardship Distributions – Consider the Consequences
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. Substantially Equal Periodic Payments
8
Internal Revenue Service. Publication 502 (2025) – Medical and Dental Expenses
9
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted
10
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11
Internal Revenue Service. Retirement Topics – Plan Loans
12
Internal Revenue Service. Hardships, Early Withdrawals and Loans
13
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14
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15
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
16
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
17
Internal Revenue Service. Instructions for Form 5329 (2025)
18
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
19
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
20
Social Security Administration. POMS HI 01101.010 – Modified Adjusted Gross Income (MAGI)
21
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
22
Social Security Administration. Income Taxes on Social Security Benefits
23
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax