What Is the 401(k) Tax Rate for Withdrawals?

Written by Nina Semczuk, CEPF®

Edited by Marie White, CEPF®

Edited by Jeff White, CEPF®

Fact Checked by Patrick Villanova, CEPF®

Updated on March 28, 2025, 3:18pm ET

Understanding the tax implications of withdrawing from your 401(k) is crucial for effective retirement planning. A 401(k) is a popular retirement savings plan that offers tax advantages, but it’s important to know how withdrawals are taxed to avoid unexpected financial burdens. Generally, withdrawals from a traditional 401(k) are subject to ordinary income tax rates, which means the amount you withdraw will be added to your taxable income for the year. This can potentially push you into a higher tax bracket, depending on your total income.

To optimize your 401(k) withdrawals and develop a tax-efficient retirement income strategy, consider consulting with a financial advisor.

What You Need to Know About 401(k) Withdrawal Taxes

A 401(k) is a tax-advantaged retirement savings plan, meaning that contributions are typically made pre-tax, reducing your taxable income during your working years. However, this tax advantage comes with a caveat: withdrawals are subject to income tax. When you start taking distributions, usually after age 59½, the money you withdraw is taxed as ordinary income. This means that the amount you take out will be added to your annual income and taxed according to your current tax bracket.

How Tax Advantages Work During the Growth Phase

Retirement accounts like 401(k)s allow your investments to grow tax-free while they remain in the account. Unlike taxable brokerage accounts, where income tax or capital gains tax applies annually, you won’t owe taxes on your 401(k) earnings as they grow.

For example, if you earn $1,500 per paycheck before taxes and contribute $300 to your 401(k), only $1,200 will be taxed. However, there are annual contribution limits. In 2025, you can contribute up to $23,500 (or $31,000 if you’re 50 or older).

Under the SECURE 2.0 Act, employees aged 60 to 63 can benefit from an increased super catch-up contribution limit. This started in 2025, and the enhanced limit will rise to $11,250, compared to the current $7,500. This means those in the target age range can contribute a total of $34,750.

What Happens When You Start Withdrawing Funds

The tax-deferred benefit ends when you begin taking distributions. At that point, the funds you withdraw are considered taxable income. Some 401(k) plans automatically withhold a portion, typically around 20%, to cover taxes. Be sure to check with your plan provider to understand how your withdrawals will be handled.

When Can You Start Making Withdrawals?

You can begin withdrawing from your 401(k) penalty-free once you turn 59½. If you don’t need the money right away, you can wait until age 73 (increasing to 75 in 2033) before mandatory withdrawals kick in. These required minimum distributions (RMDs) are set by the IRS to ensure you eventually pay taxes on your tax-deferred savings.

Understanding how 401(k) taxation works can help you plan withdrawals effectively and minimize surprises during retirement. The exception is if you have a Roth 401(k). Like with a Roth IRA, money is put into these accounts after taxes, so the distributions are generally untaxed.

Do you need help figuring out your required minimum distributions? Try SmartAsset’s RMD calculator to learn more.

401(k) Tax Rates

An advisor reviews 401(k) withdrawal taxes.

Your 401(k) withdrawals are taxed as income. There isn’t a separate 401(k) withdrawal tax. Any money you withdraw from your 401(k) is considered income and will be taxed as such, alongside other sources of taxable income you may receive. As with any taxable income, the rate you pay depends on the amount of total taxable income you receive that year.

At the very least, you’ll pay federal income tax on the amount you withdraw each year. Retirees who live in states that have additional income taxes, such as California and Minnesota, will have to pay that as well. (Some states are more tax-friendly to retirees.)

You can calculate how much you’ll owe for income tax to help plan. If you’re using your 401(k) to replace your previous salary, you can expect similar taxes as years prior. However, if you’re planning on living on less and limiting your withdrawals, you might find yourself in a lower tax bracket. If that’s the case, you’ll owe less in taxes because of your income drop.

401(k) Withdrawal Taxes and Early Distributions

You might find yourself in a situation where you need the money in your 401(k) before you reach 59.5 years of age. The account is designed to be part of your retirement plan, but circumstances come up where you can’t avoid dipping into the money for other reasons. Down payments, emergency medical bills and education costs are a few examples of expenses some people pay with 401(k) funds.

If this is the case for you, expect to pay a 10% penalty. This is on top of the income tax you’ll pay for withdrawing the funds. Remember, even if it’s paying for an emergency, it’s still counted for tax purposes as income. You’ll want to run the numbers, adding the tax and penalty tax, to see if it makes sense to pull money out early. It’s also important to factor in the opportunity cost of pulling your investments out of the market.

In some cases, there is an exception to the 10% additional tax. The IRS lists the circumstances where the tax doesn’t apply. Losing your job at 55 or starting a SOSEPP (series of substantially equal periodic payments) plan are two examples. You’ll still be on the hook for income taxes, of course.

Given the tax hit and the opportunity cost of early withdrawals, it’s not an ideal solution. Before you commit to a penalized withdrawal, consider if borrowing the money from your 401(k) might be a better solution.

How To Minimize 401(k) Withdrawal Taxes

You won’t be able to get out of paying taxes on the funds you withdraw from your 401(k). However, there are a couple of tips and tricks that might help you lower the total tax you pay. Be sure to check with a tax expert or financial advisor if you want to be sure of the best course of action for your specific situation.

If you happen to hold stock in your company within your 401(k) account, you could potentially treat the appreciation of that stock as a capital gain rather than ordinary income. The long-term (over a year) capital gain tax rate is 0%, 15% or 20%, depending on your tax bracket. For many investors, this means a lower tax rate than their ordinary income tax rate. To pull this off, you’ll need to transfer the stock into a taxable brokerage account. Don’t be afraid to consult with an expert if you want to take advantage of this strategy.

The other factor to consider is your tax bracket. If your 401(k) distributions will put you in the lower end of one tax bracket, see if you can start distributions earlier, spreading things out and potentially dropping you into a lower bracket. As long as you start after age 59.5, you could save on your total tax bill with this method.

Bottom Line

A couple review their 401(k) withdrawal taxes.

Retirement may mean an escape from work, but unfortunately, it’s not an escape from taxes. Understanding the tax implications of 401(k) withdrawals is crucial for effective retirement planning. When you withdraw funds from a traditional 401(k), the amount is typically taxed as ordinary income. This means the 401(k) tax rate for withdrawals aligns with your current income tax bracket at the time of withdrawal. Stay ahead of the game by budgeting what you’ll owe the government each year. That way, you can enjoy your retirement knowing that you won’t know your tax bill.

Tips for Retirement Savings

A financial advisor can help you create a financial plan for your retirement needs and goals. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Start saving for retirement early. No matter which retirement savings account you settle on, it’s always better to start saving sooner than later. The sooner you invest your money, the more time you have to reap the benefits of compound interest. This can have a big impact on your retirement savings.