How to Waive Taxes on a 401(k) Withdrawal

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If you’re thinking about taking money from your 401(k) — maybe you need extra funds or you’re getting close to retirement — taxes might be on your mind. A 401(k) is usually a great tool for lowering taxes while working, but withdrawing from it can lead to extra tax bills and sometimes even penalties.

Fortunately, certain strategies can help you avoid — or at least reduce — the tax hit. In this article, we’ll walk you through a variety of legal options to waive taxes on a 401(k) withdrawal and keep more of your savings in your pocket.

Why 401(k) Withdrawal Taxes Matter

When you contribute to a 401(k), you get immediate tax benefits: your contributions reduce your taxable income right away. But once you’re ready to pull out that money — particularly if you do it before 59½ — the IRS usually wants its share.

Being unaware of these rules can cost you significantly, so a little planning can go a long way in helping you save more for your retirement years.

How Are 401(k) Withdrawals Taxed?

Before we get into how to reduce or avoid the taxes on your 401(k) withdrawals, it’s important to understand how, and if, your withdrawals will be taxed.

Taxable vs. Non-Taxable Portions

There are many types of 401(k) plans, but for how to waive taxes, there are two main types: traditional and Roth. Depending on which one has the biggest impact on your taxes at withdrawal.

• Traditional 401(k): Contributions to a traditional 401(k) are made with pre-tax dollars. This means that you do not pay taxes on the money you contribute until you withdraw it. Plus, when you do make withdrawals, both your initial contributions and your investment earnings and interest are also taxable as personal income.
• Roth 401(k): Roth 401(k) contributions work exactly the opposite. Contributions to Roth 401(k)s are made with after-tax dollars, so you don’t get any upfront tax break. You pay taxes on the money you use in the year you make them. However, the key advantage is that, as long as you meet certain requirements, both the contributions and earnings are tax-free when you take a qualified withdrawal from the account later. There are a few restrictions, which we’ll get to.

Federal and State Income Taxes

When you make withdrawals from your 401(k), they will normally be taxed at the rate of the tax bracket you fall into at the time of the withdrawals. This is why they are a tax-saving vehicle: presumably you will be in a lower tax bracket during retirement than when you were working.

State taxation rates are a little trickier. Your state may or may not tax your withdrawals. Each state has its own tax laws. Some states tax retirement income, while others do not, so this will take a little research or consultation with a professional.

Penalties for Early Withdrawals

The early withdrawal penalty adds an additional 10% tax to your 401(k) withdrawal taxes. You can save a bit of money by avoiding that penalty. The simplest way to avoid the 10% additional tax is to avoid taking distributions until you reach age 59 ½. However, you also won’t pay the penalty in the following situations:

• You become permanently disabled.
• You take a series of substantially equal payments for life (SEPP).
• You take distributions up to $5,000 per child for qualified birth or adoption expenses
• You have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).
• A few other unique circumstances.

Ways to Waive Taxes on 401(k) Withdrawals

While it may not always be possible to avoid paying taxes on 401(k) withdrawals entirely, there are legal strategies you can use to minimize or waive them.

Let’s dig into some of the main ways you can legitimately avoid paying taxes on 401(k) withdrawal amounts — or at least reduce how much you owe:

Rollovers to an IRA

You can avoid paying taxes on your 401(k) by transferring the balance into an individual retirement account (IRA). 

There are a couple of different ways to do a 401(k) rollover. First, you can either have your current 401(k) plan administrator send the funds directly to your new IRA administrator, which will then place the funds in your account.

The other way to do a 401(k) rollover is through an indirect or 60-day rollover. In this case, the plan administrator sends you a check for the balance, which you must then deposit in your new account within 60 days to avoid taxes. The plan administrator must withhold taxes from the distribution, but if you deposit the money within 60 days, you’ll get the money back with your tax refund.

Be aware that, to avoid the taxes altogether, you need to roll over the entire amount you withdrew, including the taxes that were withheld. So, in essence, you’ll need to “front” that money to your new account, then get a refund later.

And remember, a rollover doesn’t eliminate the income tax due on these funds. When you make withdrawals later, you’ll be taxed on them, just like any 401(k) or IRA account.

Take Qualified Distributions From a Roth 401(k)

If you have a Roth 401(k), you can take tax-free withdrawals as long as you meet certain conditions. The two main ones are that your Roth 401(k) account must be at least five years old and you must be 59 ½ years old when you take your withdrawal.

Use the Rule of 55

If you need to access your 401(k) money before age 59 ½, the IRS’s Rule of 55 (or Separation of Service exception) could allow you to do it penalty-free. This rule states that if you turn 55 years old, or older, in the calendar year that you lose or leave your job, your withdrawals are not subject to the 10% early withdrawal penalty.

Keep in mind, you will still owe taxes on your withdrawals at your current tax bracket. 

How to Calculate Withdrawals to Minimize Tax Burdens:

• First, identify your income tax bracket. Include any 401(k) withdrawals you plan to make in the calendar year.
• Next, find out if your state assesses taxes on retirement income.
• Finally, calculate your tax burden, taking into account any deductions.

Qualified Charitable Distributions (QCDs)

If you converted your 401(k) to an IRA account, you might be able to waive taxes on withdrawals through charitable giving. If you are age 70½, as of 2025, you can make up to $108,000 in tax-free charitable donations. This means that you can withdraw the money and not pay taxes on it.

The money has to go directly to a qualifying charity. If so, you can exclude this withdrawal amount from your taxable income for the calendar year you make it. If you are age 73 or over, this also satisfies and avoids the tax on the required minimum distributions, as long as they meet the minimum.

Tax Implications of Early vs. Late Withdrawals

In life, timing is everything. With 401(k)s, that goes double. Timing your withdrawals properly can avoid a lot of taxes. For instance, withdrawing funds too early, when penalties are assessed or when you are in a high tax bracket, can crush all the hard saving and planning you did.

Waiting till later in retirement can allow your funds to grow and your tax bracket to potentially shrink, giving a double advantage. However, every situation is different and the complexity of IRS and state tax laws make seeking professional guidance a smart — and likely money-saving — move.

Final Take to GO

It’s challenging to completely avoid taxes on 401(k) withdrawals, but these approaches — like rolling over to an IRA, taking advantage of Roth 401(k) rules or making qualified charitable donations — can make a big difference.

Keep in mind:

• Age requirements (59½, 70½, 73) play a huge role in whether you owe extra taxes or penalties.
• Roth accounts can offer tax-free withdrawals if you meet the rules.
• Rule of 55 can save you that 10% penalty if you leave your job the year you turn 55 or later.
• Consult a professional if your situation is complex or you’re unsure about the details.

Your 401(k) is there to support you, not sink you with tax bills. The best strategy is to keep learning, compare your options, and possibly talk to a financial advisor who can tailor these moves to your personal circumstances. If you’re hungry for more info, check out our related resources on retirement planning or Roth vs. Traditional 401(k). By understanding how taxes and penalties work, you’ll be better prepared to protect your retirement stash.

Information is accurate as of March 5, 2025.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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