401(k) Withdrawal Taxes Explained: Rates, Rules, and FAQs
You’ve spent years building up your retirement savings—now the big question is how much of that money you actually get to keep after taxes. If you’re over 50 and starting to think seriously about drawing from your retirement accounts, it’s crucial to understand how your 401(k) withdrawals are taxed.
Without a plan, you might end up sending more to the IRS than you need to. With good planning, you can keep more of your hard-earned savings and create a more predictable retirement income stream. This guide explains how 401(k) withdrawals are taxed, how they affect your federal and state tax rates, and some strategies to help you avoid unpleasant tax surprises.
Main Points at a Glance
See how taxes apply to your 401(k) payouts: Understand how federal and state income taxes work on your distributions and why your overall income level is so important.
Know the penalty rules: Learn when early withdrawal penalties apply, and where exceptions for items like medical expenses, emergencies, and rollovers may help.
Plan for tax-smart retirement income: Use thoughtful withdrawal strategies to help stay in lower tax brackets and make your savings last longer.
How 401(k) Withdrawals Are Taxed
Distributions from a pre-tax 401(k) are generally taxed as ordinary income at the federal level and may also be taxed by your state. That’s because contributions to a traditional 401(k) are usually made with pre-tax dollars—money that hasn’t been taxed yet.
If you have Roth or after-tax contributions in your 401(k), those portions may qualify for tax-free withdrawals if certain rules are met. Contributions to Roth or after-tax 401(k) accounts are made with money that has already been taxed.
What Tax Rate Applies to 401(k) Withdrawals?
There isn’t a single flat “401(k) tax rate.” Instead, your withdrawals are taxed using the same federal income tax brackets that apply to your other income. Since pre-tax 401(k) contributions reduce taxable income when you put the money in, the trade-off is that withdrawals are taxed later.
Your effective tax rate on withdrawals depends on your total taxable income, which may include:
401(k) and IRA distributions
Investment income
Social Security benefits
Pension income
Other sources of taxable income
The higher your taxable income, the higher the marginal tax bracket you may fall into.
According to the IRS, here are the 2025 federal tax brackets for taxpayers filing as Married Filing Jointly:
MFJ Taxable Income | Tax Rate
$0 to $23,850 | 10%
$23,851 to $96,950 | 12%
$96,951 to $206,700 | 22%
$206,701 to $394,600 | 24%
$394,601 to $501,050 | 32%
$501,051 to $751,600 | 35%
Over $751,600 | 37%
Example
In 2025, a married couple, both age 62, have an adjusted gross income (AGI) of $100,000. Filing jointly, they use the $30,000 standard deduction, leaving $70,000 of taxable income. That places them in the 12% federal tax bracket.
If they withdraw $34,000 from their 401(k) accounts, their taxable income increases to $104,000, which pushes part of their income into the 22% tax bracket.
Key point: Only the income above $96,950 (the top of the 12% bracket for 2025) is taxed at 22%. The income below that threshold is still taxed at the lower rates.
When Are Taxes Due on 401(k) Withdrawals?
You owe federal—and possibly state—income taxes on pre-tax 401(k) withdrawals in the calendar year you take the distribution. Your 401(k) provider reports your withdrawals to the IRS and to you on Form 1099-R, which you receive the following spring.
Most 401(k) distributions are subject to a mandatory 20% federal tax withholding, and some states have their own minimum withholding requirements. When you request a distribution, you may have the option to withhold more than the required minimum.
If you withhold enough throughout the year, you may not owe anything extra when you file your tax return.
If you under-withhold, you could face an additional tax bill or even underpayment penalties.
If you prefer to withhold less than 20% for federal taxes, you may need to roll your 401(k) into an IRA, where withholding rules are more flexible.
Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMDs) are the mandatory withdrawals you must take from your pre-tax retirement accounts once you reach a certain age. They are intended to ensure that tax-deferred savings are eventually taxed rather than allowed to grow untouched forever.
The SECURE 2.0 Act updated the starting age for RMDs. Under current rules:
Once you reach age 73, you must begin taking RMDs from your pre-tax 401(k) and other pre-tax retirement accounts.
Your first RMD must be taken by April 1st of the year after the year you turn 73.
Every RMD after that is due by December 31st each year.
In 2033, the RMD starting age is scheduled to increase to 75, based on current law.
How RMD Amounts Are Calculated
Each year, your RMD is generally calculated by dividing your prior year-end account balance by a life expectancy factor from the IRS Uniform Lifetime Table.
A larger account balance results in a larger RMD.
A smaller life expectancy factor (often as you get older) also increases the required withdrawal.
You can estimate your RMD using the IRS RMD Worksheet or an online RMD calculator.
What Happens If You Miss an RMD?
RMDs are taxed as ordinary income, just like other 401(k) withdrawals. If you don’t take your full RMD, the IRS can charge a 25% penalty on the portion you should have withdrawn but did not—on top of the regular income tax owed on that amount.
Are There Any Exceptions to RMD Rules?
There are a few important situations where RMD rules may differ:
Still working: If you’re still employed and actively participating in your current employer’s 401(k), you might be allowed to delay RMDs from that plan, though this usually doesn’t extend to other retirement accounts.
Roth 401(k) rule change: Roth 401(k)s are no longer subject to RMDs, which aligns their treatment with Roth IRAs.
Because RMDs increase your taxable income, they can raise your overall tax bill or even push you into a higher tax bracket. This is why planning around RMDs—using strategies such as Roth conversions and Qualified Charitable Distributions (QCDs)—can be so valuable.
Early 401(k) Withdrawals and the 10% Penalty
Taking money from your 401(k) before age 59½ can trigger a 10% early withdrawal penalty, in addition to the regular income tax due on the distribution. This penalty is designed to discourage dipping into retirement savings too soon, which can seriously erode your long-term nest egg.
However, the IRS allows several exceptions where the 10% penalty may not apply. Some common examples include:
Rollovers: Moving money from one retirement plan to another (such as a 401(k) to an IRA) within 60 days can avoid both current taxation and the 10% penalty if done correctly.
Disability: If you become permanently disabled, penalty-free early withdrawals may be allowed.
Personal emergency expense: Many 401(k) plans now permit one penalty-free withdrawal per year for personal emergency expenses, up to the lesser of $1,000 or the vested account balance above $1,000.
Medical expenses: Withdrawals used for medical expenses that exceed 7.5% of your AGI (adjusted gross income) may avoid the 10% penalty.
Early separation from employment: If you leave your job between ages 55 and 59½, you may be able to take penalty-free withdrawals from that employer’s 401(k). (Regular federal and state income taxes still apply.) This particular exception does not apply to IRAs.
Qualified Domestic Relations Order (QDRO): If a withdrawal is required under a divorce-related court order, the 10% penalty may be waived.
Birth or adoption of a child: You may withdraw up to $5,000 penalty-free for qualifying birth or adoption expenses.
Even if a penalty exception applies, income taxes may still be due on the withdrawal. It’s important to consult a tax professional before taking early distributions.
The Role of State Taxes in 401(k) Withdrawals
In addition to federal taxes, your 401(k) withdrawal may be subject to state income tax, depending on where you live. States generally fall into three broad categories:
States with no income tax
States with an income tax that does not tax retirement income
States with an income tax that does tax retirement income
Here’s how the categories break down:
States With No Income Tax
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire
States With an Income Tax That Don’t Tax Retirement Income
Illinois, Iowa, Mississippi, Pennsylvania
States With an Income Tax That Tax Retirement Income
All other states
Example
Suppose you’re already in the 22% federal tax bracket, and your state taxes retirement income at 3.125%. If you withdraw an additional $10,000 from your 401(k) and this does not push you into a higher federal tax bracket, you’d owe:
Federal tax: $2,200 (22% of $10,000)
State tax: $312.50 (3.125% of $10,000)
Total tax: $2,512.50, or 25.125% of the withdrawal
Comparing Roth 401(k) and Traditional 401(k)
A Roth 401(k) and a Traditional 401(k) differ mainly in when you pay the tax. Similar tax rules apply to Traditional IRAs and Roth IRAs as well.
Roth 401(k):
Contributions are made with after-tax dollars.
If certain conditions are met (such as the account being at least five years old and you being at least age 59½), distributions are typically tax-free.
Traditional 401(k):
Contributions are made with pre-tax income.
You’ll owe federal and possibly state income tax when you withdraw money in retirement.
Strategies to Reduce Taxes on 401(k) Withdrawals
While you can’t avoid taxes entirely, there are strategies that may help reduce the overall tax impact of your withdrawals. Always coordinate these moves with both a financial planner and a tax professional.
Roth conversions:
You may be able to convert pre-tax 401(k) or IRA dollars into Roth dollars. Once in a Roth, growth is tax-deferred, and qualified withdrawals are generally tax-free if the account is over five years old and you’re at least 59½. You’ll owe income tax on the amount converted in the year of the conversion.Strategic withdrawals:
You can time and size your withdrawals to help manage taxable income—for example:Trying to avoid crossing into a higher tax bracket or triggering a higher IRMAA Medicare premium bracket
Taking somewhat larger distributions earlier in retirement to help reduce the size of future RMDs after age 73
Qualified Charitable Distributions (QCDs):
In 2025, the IRS allows you to transfer up to $108,000 of your RMD directly from your 401(k) or IRA to a qualified charity. This can satisfy all or part of your RMD without adding that amount to your taxable income, while supporting causes you care about.
Steps to Plan Your 401(k) Withdrawals
A thoughtful withdrawal plan helps you transition into retirement with fewer surprises:
Estimate your income needs
Start by building a realistic budget based on your actual spending. Factor in changes such as healthcare costs, lifestyle adjustments, hobbies, and travel. This gives you a target for how much income you’ll need each year.Add up your fixed income sources
Determine how much of your income will come from Social Security, pensions, or other reliable sources. The gap between your income need and these fixed sources is what you’ll likely have to cover with 401(k)s, IRAs, and other investments.Dial in your tax withholding
Work with your financial planner and tax professional to decide how much to withhold for federal and state taxes from each distribution. Proper withholding can reduce the risk of big tax bills or penalties at filing time.
Why Professional Guidance Matters
Retirement income planning isn’t just about how much you can withdraw—it’s also about how much you get to keep after taxes, and how long your savings will last. A coordinated approach between a financial planner and a tax professional can help you:
Structure withdrawals in a tax-efficient way
Stay ahead of RMD rules and deadlines
Evaluate Roth conversions and charitable strategies
Align your investment, tax, and income plans
How FMD Wealth Advisors Can Support Your Retirement Planning
At FMD Wealth Advisors, we help clients make informed decisions about their 401(k) withdrawals and overall retirement income strategy. We walk you through tax planning, RMD schedules, withdrawal strategies, and coordination with your other assets so you can approach retirement with more clarity and confidence.
If you’re approaching retirement—or already there—and want a plan for tax-efficient withdrawals, we’re here to help you explore your options and build a strategy tailored to your situation.
Frequently Asked Questions (FAQs)
How much tax will I owe on a 401(k) withdrawal?
The tax you’ll pay depends on your federal and state tax brackets in the year you take the distribution. Your 401(k) withdrawals are generally taxed as ordinary income at the federal level and may also be subject to state income tax. Many plans require at least 20% federal withholding on distributions. If you prefer more flexibility around withholding, rolling your 401(k) into an IRA may be worth considering.
Is there a way to avoid the 20% withholding on a 401(k) payout?
Mandatory 20% federal withholding often applies to early or lump-sum 401(k) distributions. You may be able to avoid this by arranging a direct rollover from the 401(k) into an IRA or another eligible retirement plan instead of taking the money as a cash distribution. Always confirm the rules with your plan provider and tax professional.
How can I estimate taxes on an early 401(k) withdrawal?
If you withdraw from a 401(k) before age 59½, you’ll generally owe:
Regular federal income tax
Any applicable state income tax
A potential 10% early withdrawal penalty, unless you qualify for an exception
A tax and financial professional can help you project how much tax and penalty you might owe based on your age, income, state of residence, and the size of the withdrawal.
If you’re thinking about enhancing your retirement plan, FMD Wealth Advisors can help analyze the numbers, consider tax implications, and build a comprehensive strategy that includes your 401(k) assets. Schedule a complimentary intro call today.
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