Understanding Taxes on 401(k) Contributions and Withdrawals
Written by
Rudri Patel
Edited by
Nupur Gambhir
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Yes, your 401(k) is taxed — but when and how depends on your account type and when you withdraw funds.
With a traditional 401(k), you typically get a tax break on contributions now but pay taxes later when you take the money out. With a Roth 401(k), it’s the opposite: you pay taxes upfront, and qualified withdrawals are tax-free. This guide breaks down how contributions, investment growth, and withdrawals are taxed so you can plan smarter and avoid surprise tax bills.
Is a 401(k) Taxable?
Withdrawals from a traditional 401(k) are taxed as ordinary income because the contributions were made pre-tax. This lowers your taxable income for the year you contribute. Both your contributions and earnings grow tax-deferred, meaning you won’t owe taxes while the money stays in the account. Once you withdraw funds, they’re taxed at your income tax rate for that year.
If you take money out before age 59½, you’ll also face a 10% early withdrawal penalty unless you qualify for an exception.
By contrast, Roth 401(k) withdrawals aren’t taxed, as long as you’re at least 59½ and the account has been open for five years or more.
Traditional or Roth? Here’s the Tax Difference
Traditional 401(k): Contribute now, pay taxes when you withdraw.
Roth 401(k): Pay taxes upfront, withdraw tax-free later.
How 401(k) Taxes Work
Whether you have a traditional 401(k) or a Roth 401(k), your money will grow tax-deferred. Here’s how 401(k) taxes work when you choose to withdraw funds:
- Traditional 401(k): All contributions are pre-tax, but are taxed as ordinary income when you withdraw.
- Roth 401(k): Contributions are made after taxes, and the withdrawals are tax-free if they are considered qualified. Withdrawals are qualified if they are made after age 59½ and the account has been open for at least five years.
Tax Rate on 401(k) Distributions
When you take money out of your 401(k), the withdrawal is taxed as ordinary income and added to your other earnings for the year. Your total income then determines the tax bracket — and rate — that applies to your distribution.
For example, if your total income places you in the 22% tax bracket, your 401(k) distributions will be taxed at the same rate.
Tax Rate for Single Filers for 2025
| Tax Bracket | Income Range | 401(k) Withdrawal Tax Rate |
|---|---|---|
| 10% | Income less than $11,925 | 10% |
| 12% | Income over $11,925 | 12% |
| 22% | Income over $48,475 | 22% |
| 24% | Income over $103,350 | 24% |
| 32% | Income over $197,300 | 32% |
| 35% | Income over $250,525 | 35% |
| 37% | Income over $626,350 | 37% |
Tax Rate for Married Filers for 2025
| Tax Bracket | Income Range | 401(k) Withdrawal Tax Rate |
|---|---|---|
| 10% | Income less than $23,850 | 10% |
| 12% | Income over $23,850 | 12% |
| 22% | Income over $96,950 | 22% |
| 24% | Income over $206,700 | 24% |
| 32% | Income over $394,600 | 32% |
| 35% | Income over $501,050 | 35% |
| 37% | Income over $751,600 | 37% |
When Do You Pay Taxes on a 401(k)?
For a traditional 401(k), you generally pay taxes when you start taking money out in retirement. These withdrawals are taxed as ordinary income in the year you receive them. The IRS also requires you to begin taking required minimum distributions (RMDs) at age 73. Once you withdraw your RMDs — or any other amount — the funds are added to your taxable income for that year, and you’ll pay taxes based on your tax bracket.
When You Can Withdraw From a Roth 401(k) Tax-Free
While traditional 401(k)s require you to start taking withdrawals at age 73, Roth 401(k)s give you more flexibility. There are no required minimum distributions during your lifetime, so you can let your money grow as long as you want without being forced to take it out. And when you do withdraw, your money comes out tax-free — as long as you’re at least 59½ and the account has been open for at least five years.
This makes Roth 401(k)s especially appealing if you want to manage your tax liability in retirement or leave the account to your heirs, since the funds can continue to grow untouched.
401(k) Early Withdrawal Penalty and Tax Rules
If you take money out of your 401(k) before age 59½, you’ll generally face a 10% early withdrawal penalty — on top of paying income tax on the amount you withdraw.
However, certain situations qualify for an exception to the penalty. These include:
- Withdrawals due to disability
- Withdrawals for qualified medical expenses that exceed a certain percentage of income
- Substantially equal periodic payments (SEPP)
- If you leave your job in the year you turn 55 or later
Think Twice Before Tapping Your 401(k) Early
Avoid early withdrawals unless it’s a true emergency — taxes and penalties can add up.
How 401(k) Rollovers Are Taxed
When you move money from one retirement account to another, the tax impact depends on where the funds go. Here’s how common rollover scenarios are treated:
- Rolling to another 401(k) or traditional IRA: A direct rollover to another 401(k) or traditional IRA is tax-free.
- Rolling to a Roth IRA: Because 401(k) funds are pre-tax, rolling them into a Roth IRA triggers taxes on the converted amount.
- Reporting requirement: All rollovers — even tax-free ones — must be reported on your tax return.
How to Minimize Taxes on Your 401(k) Withdrawals
With careful planning, you can reduce the amount you owe in taxes when taking money from your 401(k). Here are some strategies to consider:
- Make withdrawals gradually: Withdraw during lower-income years to help keep your distributions from pushing you into a higher tax bracket.
- Convert to Roth in low-income years: Converting to a Roth 401(k) triggers taxes, but doing so in years when your income is lower can reduce the tax bill.
- Coordinate with other retirement income: Time your 401(k) withdrawals alongside Social Security and pension payments to avoid moving into a higher bracket.
- Delay RMDs with a Roth rollover: Before age 73, roll your Roth 401(k) into a Roth IRA. Roth IRAs don’t require RMDs, allowing your savings to grow tax-free longer.
There are strategies you can use to minimize your taxes on your 401(k) withdrawals:
Final Thoughts: Plan Ahead for 401(k) Taxes
Taxes are inevitable, and in the case of a 401(k) you won’t pay taxes until you make a withdrawal. Ideally you want to plan when you should withdraw and consider other sources of income so that you aren’t pushed into a higher tax bracket.
One pivotal strategy is to know your income now vs. in retirement to get a better handle on how you should handle your withdrawals.
Talk to a financial advisor to help you plan effectively and choose a mix of pre-tax and Roth contributions to stay flexible.
FAQ
- How is a 401(k) taxed when I retire?
- Withdrawals are taxed as ordinary income based on your tax bracket in the year you take them.
- What tax rate applies to my 401(k) withdrawals?
- There’s no flat tax rate. Withdrawals are added to your other income, and your total income determines the tax rate.
- Are 401(k) withdrawals taxed as capital gains or income?
- They are taxed as ordinary income.
- Can I avoid the 10% early withdrawal penalty?
- Yes, if you withdraw after age 59½. Exceptions include: Substantially Equal Periodic Payments (SEPP), medical expenses above a set percentage of your AGI, disability, or retiring at age 55 or older as an employee.
- Is a Roth 401(k) taxed at all?
- No, provided you are at least 59½ and have had the account for at least five years.
