Tax on a 401(k) Withdrawal: Rates, Penalties, and Exceptions

Money you pull from a traditional 401(k) is taxed as ordinary income at your federal rate, which runs from 10% to 37% in 2026, and if you’re under 59½ you generally owe another 10% early withdrawal penalty on top. So the tax on a 401(k) withdrawal depends on three things: how much you take out, your age when you take it, and whether the account is traditional or Roth. Roth withdrawals that meet the qualifying rules come out tax-free.

How Traditional 401(k) Withdrawals Are Taxed

A distribution from a traditional 401(k) is treated as ordinary income, not at the lower rates that apply to long-term capital gains or qualified dividends.¹ The dollars you withdraw get added to your wages, freelance income, interest, and anything else you earned that year, and the total determines your bracket.

For tax year 2026, the federal brackets for single filers are:²

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

Thresholds for married couples filing jointly are roughly double.² Because the system is progressive, a withdrawal can push part of your income into a higher bracket. If your wages give you $48,000 of taxable income, you sit in the 12% bracket. Add a $20,000 withdrawal and your total reaches $68,000; the portion above $50,400 gets taxed at 22%.

The withdrawal also raises your adjusted gross income, which can shrink credits and deductions that phase out at higher incomes. You report 401(k) distributions on Form 1040, and any tax owed beyond what was withheld is due when you file.³

The 10% Early Withdrawal Penalty

Take money out of a traditional 401(k) before age 59½ and you owe a 10% additional tax on top of regular income tax.⁴ The penalty applies to whatever portion of the withdrawal is taxable. On a $10,000 early withdrawal, that’s $1,000 in penalty before income tax is calculated. You report and pay it using IRS Form 5329, attached to your return.⁵

The combined bill can be steep. Someone in the 22% bracket who takes a $10,000 early withdrawal could owe $2,200 in income tax plus $1,000 in penalty, or $3,200 total. That’s 32% of the withdrawal gone before it reaches the checking account.

Exceptions That Waive the 10% Penalty

Several situations let you withdraw before 59½ without the penalty. The money is still taxed as ordinary income in most cases; only the 10% is waived.⁶

Rule of 55

If you leave your job during or after the calendar year you turn 55, distributions from that employer’s 401(k) are penalty-free.⁷ This only applies to the plan tied to your most recent employer, not to 401(k) accounts from earlier jobs. Qualified public safety employees, including firefighters, law enforcement officers, corrections officers, and air traffic controllers, get the same treatment starting at age 50.⁶

Substantially Equal Periodic Payments

You can set up a series of roughly equal payments based on your life expectancy using IRS-approved calculation methods. Once you start, you must continue for at least five years or until you reach 59½, whichever comes later. Change the payment amount or stop early and the 10% penalty is applied retroactively to every distribution you already took.⁸

Other Situations That Skip the Penalty

Beyond those two, the penalty is waived for distributions connected to:⁶

Total and permanent disability certified by a physician
Unreimbursed medical expenses above 7.5% of your adjusted gross income
Birth or adoption, up to $5,000 per child for qualified expenses
Terminal illness, once a physician certifies the condition
Qualified disaster recovery for people affected by a federally declared disaster⁹
Emergency personal expenses, one distribution per calendar year capped at the lesser of $1,000 or your vested balance above $1,000
Domestic abuse, up to the lesser of $10,000 or 50% of your vested balance, taken within 12 months of the incident

Each exception has to be documented on Form 5329 when you file. Claim one without the proper paperwork and the IRS may apply the penalty automatically.¹⁰

One thing worth knowing: a hardship withdrawal is not automatically penalty-free. Even if your plan approves it for medical bills, eviction, or funeral costs, the money is still taxed as ordinary income and the 10% penalty applies unless you separately qualify for one of the exceptions above. Hardship distributions also cannot be rolled into another retirement account.¹¹

The 20% Withholding on Distribution Checks

When your plan administrator sends a distribution directly to you, federal law requires 20% withheld for income taxes off the top.¹² Request $50,000 and you receive $40,000; the other $10,000 goes to the IRS as a prepayment.

That 20% is a withholding estimate, not a flat rate. If your actual bracket is higher, you owe the difference at filing. If it’s lower, the excess comes back as a refund.¹³ The withholding rule doesn’t apply to a direct rollover, where funds move between plan custodians without ever touching your hands.¹⁴

The 60-day indirect rollover is where people get hurt. If you take the check and want to roll the full amount into another retirement account, you have 60 days, but you have to deposit the full original amount, including the 20% that was withheld. Received $8,000 from a $10,000 distribution? You need to add $2,000 out of pocket so that $10,000 lands in the new account. The $2,000 comes back as a refund at tax time. Deposit only the $8,000 you received and the withheld $2,000 is treated as a taxable distribution, and if you’re under 59½ it triggers the 10% penalty too.¹⁴

Roth 401(k) Withdrawals Follow Different Rules

Roth 401(k) contributions are made with after-tax dollars, so the tax picture flips. A qualified distribution, taken after you reach 59½ (or become disabled or die) and after the account has been open at least five tax years, is completely tax-free. Both contributions and earnings come out with zero federal tax.¹⁵

The five-year clock starts on January 1 of the tax year you made your first Roth contribution to the plan. First contribution in October 2022? The five-year period began January 1, 2022, and ends after December 31, 2026.¹⁵

If you take a Roth withdrawal before meeting both requirements, only the earnings portion is taxable. Your original contributions come out tax-free because you already paid tax on that money. The split is calculated using a pro-rata formula based on the ratio of contributions to total balance, and the earnings portion can also be hit with the 10% early withdrawal penalty if you’re under 59½.¹⁵

Required Withdrawals After Age 73

Once you hit age 73, the IRS requires you to start taking a minimum amount from your traditional 401(k) each year, called a required minimum distribution (RMD).¹⁶ The threshold rises to 75 in 2033. If you’re still working past 73 and don’t own 5% or more of your employer’s business, you can delay RMDs from your current employer’s plan until the year you actually retire.

RMDs are taxed as ordinary income like any other traditional withdrawal. Miss one and the IRS charges a 25% excise tax on the amount you should have taken, dropping to 10% if you fix the shortfall within two years.¹⁶ Your first RMD is due by April 1 of the year after you turn 73; every one after that is due by December 31. Waiting until April for the first RMD means two RMDs in the same calendar year, which can push you into a higher bracket.

How a Withdrawal Can Raise Your Medicare and Social Security Costs

A big traditional 401(k) withdrawal doesn’t just move you up an income bracket. It can also raise Medicare premiums and increase the share of your Social Security benefits that get taxed.

Medicare Part B premiums are based on your modified adjusted gross income from two years earlier. In 2026, the standard Part B premium is $202.90 per month if income is below $109,000 (single) or $218,000 (joint). Above those levels, income-related monthly adjustment amounts (IRMAA) apply.¹⁷ A single filer with income between $137,001 and $171,000 pays $405.80 per month, double the standard amount. At $500,000 and up, the monthly premium reaches $689.90. Because 401(k) distributions count toward modified adjusted gross income, one large withdrawal can push you across an IRMAA threshold and raise your premium for a full year. Spreading withdrawals across multiple years can keep you under.

Social Security benefits get taxed based on “provisional income,” which is half your Social Security benefits plus your other taxable income. Cross $25,000 (single) or $32,000 (joint) and up to 50% of your benefits become taxable; at higher levels, up to 85% get taxed.¹⁸ A 401(k) withdrawal raises provisional income dollar for dollar, so even a moderate distribution can trigger taxation of benefits that would otherwise be tax-free.

Don’t Forget State Income Tax

Federal taxes are only part of the bill. Most states with an income tax treat 401(k) distributions as taxable income and apply their own rates on top. A handful of states have no income tax, and a few others fully exempt retirement income. Some states offer partial exclusions, commonly capped at amounts ranging from a few thousand dollars up to $65,000 or more, that may depend on your age or overall income. Check your state’s rules before a large withdrawal. In a state with a 5% income tax, every dollar you pull costs 5 percentage points more than the same withdrawal in a no-tax state.

1
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
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4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: 10-Percent Additional Tax for Early Distributions
5
Internal Revenue Service. About Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
6
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7
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11
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12
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13
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14
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15
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16
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17
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18
Internal Revenue Service. Social Security Income