401(k) Tax Rules: Withdrawals, Deductions & More

Contributions to a traditional 401(k) are typically tax-deferred, reducing taxable income in the year they are made, while withdrawals in retirement are taxed as ordinary income. Unlike traditional 401(k) plans, Roth 401(k) accounts are funded with post-tax contributions, which means withdrawals can be taken tax-free if certain conditions are met. Early withdrawals from a 401(k) before age 59½ may be subject to income taxes and an additional 10% penalty, though exceptions exist.

A financial advisor can help you develop a retirement plan and budget that meets your long-term goals.

Do You Pay Tax on 401(k) Contributions?

A 401(k) is a tax-deferred account. That means you do not pay income taxes when you contribute money. Instead, your employer withholds your contribution from your paycheck before the money can be taxed. As you choose investments within your 401(k) and as those investments grow, you also do not need to pay income taxes on the growth. Instead, you defer paying those taxes until you withdraw the money.

Keep in mind that while you do not have to pay income taxes on the money you contribute to a 401(k), you still pay FICA taxes, which go toward Social Security and Medicare. That means that the FICA taxes are still calculated based on the full paycheck amount, including your 401(k) contribution.

Do You Need to Deduct 401(k) Contributions on Your Tax Return?

You do not need to deduct 401(k) contributions on your tax return. There is no way for you to deduct that money. When employers report your earnings at the end of the year, they account for the fact that you made 401(k) contributions.

To give you an example, let’s say you have a salary of $50,000 and you contribute $5,000 into a 401(k) account. Only $45,000 of your salary is taxable income. Your employer will report that $45,000 on your W-2. So if you try to deduct the $5,000 when you file your taxes, you will be double-counting your contributions, which is incorrect.

How Much Tax Do You Pay on 401(k) Distributions?

A withdrawal from a 401(k) after you retire is officially known as a distribution. While you’ve deferred taxes until now, these distributions are now taxed as regular income. That means you will pay the regular income tax rates on your distributions. You pay taxes only on the money you withdraw. If you withdraw $10,000 from your 401(k) over the year, you will only pay income taxes on that $10,000. It’s possible to withdraw your entire account in one lump sum, though this could push you into a higher tax bracket for the year, so it’s smart to take distributions more gradually.

The good news is that you will only have to pay income tax. Those FICA taxes (for Social Security and Medicare) only apply during your working years. You will have already paid those when you contributed to a 401(k) so you don’t have to pay them when you withdraw money later. (Indeed, now is about the time you’ll start to see the benefits of paying these taxes when you start using Social Security and Medicare.)

State and local governments may also tax 401(k) distributions. As with the federal government, your distributions are regular income. The tax you pay depends on the income tax rates in your state. If you live in one of the states with no income tax, then you won’t need to pay any income tax on your distributions. So depending on where you live, you may never have to pay state income taxes on your 401(k) money.

Taxes on Early 401(k) Withdrawals

The minimum age when you can withdraw money from a 401(k) is 59 ½. Withdrawing money before that age typically results in a 10% penalty on the amount you withdraw This is in addition to the federal and state income taxes you pay on this withdrawal. There are exceptions to this early withdrawal penalty, though.

If you want to remove money from a 401(k) account without paying this penalty, you will need to meet certain criteria. According to the IRS, you generally don’t have to pay an early withdrawal penalty if you experience “an immediate and heavy financial need.” This may apply when you have medical expenses that aren’t reimbursed by your insurance and which exceed 7.5% of your adjusted gross income (AGI). There are also other exceptions, such as for disabled taxpayers. The IRS provides a list of exemptions from this penalty.

The big caveat here is that the amount you can withdraw tax-free is exactly enough to cover the cost of this financial need. And you’ll still pay the full income tax on your withdrawal; only the 10% penalty is waived.

Taxes on Employer Contributions to Your 401(k)

In addition to your own contributions, an employer may also contribute to your 401(k). Once those funds are deposited into your account, they receive the same tax-deferred treatment as your contributions. You do not pay taxes while the money remains in the account, but withdrawals are taxed as ordinary income.

Any employer matching is not subject to payroll taxes and does not count toward the employee contribution limit. For 2026, employee contributions may not exceed $24,500, or $32,500 for participants age 50 or older. Participants between ages 60 and 63 may contribute up to $34,750 due to the super catch-up provision that took effect in 2025.

Because employer contributions are excluded from these limits, they allow total retirement savings to exceed what an employee could contribute on their own, subject to overall plan contribution caps.

Do You Pay Taxes When Rolling Over a 401(k)?

You may want to transfer funds from an employer’s 401(k) into another account in a few instances. The most common situation is when you leave an employer and want to transfer funds from your previous employer into your new employer’s 401(k), or your retirement account (IRA).

Whenever you withdraw money from a 401(k), you have 60 days to put the money into another tax-deferred retirement plan. If you transfer the money within 60 days, you will not have to pay any taxes or penalties on your withdrawals. You will need to say on your tax return that you made a transfer, but you won’t pay anything. If you don’t make the transfer within 60 days, the money you withdrew will add to your gross income and you will have to pay income tax on it. You will also pay any applicable penalties if you withdraw before age 59 ½.

If you don’t want to worry about missing the 60-day deadline, you can make a direct 401(k) rollover. This means the money goes directly from one custodian (for instance, the 401(k) provider) to another (for instance, a brokerage handling your IRA) without ever being in your hands.

Finally, note that if you’re rolling over a 401(k) into a Roth IRA, you’ll need to pay the full income tax on the rolled-over amount. However, there’s no 10% penalty for doing this before age 59 ½.

Taxes on Other Types of 401(k) Plans

All of the information above applies to traditional 401(k) plans. However, there are variations on the traditional 401(k). Some of these have different rules on taxation.

SIMPLE 401(k) plans and safe harbor 401(k) plans function mostly the same regarding employee taxes. They differ mostly in that employers have to make certain contributions. SIMPLE 401(k) plans also have a lower contribution limit.

The other type of 401(k) to note is a Roth 401(k). These work quite differently from traditional 401(k) plans. All contributions you make to a Roth 401(k) come from money that you have already paid payroll and income taxes on. Since you pay taxes before you contribute, you do not need to pay any taxes when you withdraw the money.

It’s advantageous to use a Roth 401(k) if you are in a low-income tax bracket and expect that you will find yourself in a higher bracket later in your life. This is very similar to why you might want a Roth IRA.

401(k) Taxes vs. IRA Taxes

If your employer doesn’t offer a 401(k) and you decide to contribute to a traditional IRA instead, your taxes will work very similarly. However, your employer doesn’t manage your IRA. You are responsible for making contributions, so your employer won’t consider any of those contributions when reporting your earnings at the end of the year. Because your employer isn’t excluding IRA money from your earnings, you will need to deduct your contributions on your tax return if you want to get the tax benefits.

One big difference with 401(k) plans and IRAs is that IRAs have a much lower contribution limit. You can only deduct $7,500 in IRA contributions for 2026, up from $7,000 in 2025. There are also income limits above which you can’t contribute this full amount. If you’re 50 or older you can add an extra $1,100 per year as a “catch-up” contribution, which raises the 2026 limit to $8,100, a$100 increase from 2025.

How Tax Brackets and Timing Affect 401(k) Withdrawals

The timing of when you take money out of a 401(k) can change how much tax you pay on those withdrawals. Because distributions are treated as ordinary income, pulling larger amounts in a single year can push you into a higher tax bracket. Spreading withdrawals over multiple years may keep more of your income taxed at lower rates, depending on your other sources of income.

Required minimum distributions (RMDs) also affect timing. Once you reach the applicable RMD age, you must begin taking withdrawals from traditional 401(k) accounts, whether you need the income or not. These required withdrawals add to your taxable income each year and can interact with Social Security benefits, Medicare premiums and other income sources.

Some people consider withdrawals before RMDs begin to manage future tax exposure. Taking distributions earlier, during years with lower income, may reduce the size of later required withdrawals. This approach depends on factors such as employment status, other savings and expected retirement income.

Because tax brackets, income sources, and retirement timelines vary, withdrawal timing often plays a meaningful role in overall tax planning. Reviewing how distributions fit alongside wages, Social Security and other income can clarify how different withdrawal patterns affect taxes over time.

Bottom Line

Traditional 401(k) plans are tax-deferred so you don’t have to pay income taxes on your contributions. You will have to pay other payroll taxes, like Social Security and Medicare taxes. Since your employer considers your contributions when calculating your taxable income on your W-2, you don’t need to deduct your 401(k) contributions on your tax return. Come retirement, all withdrawals you make are treated as regular income. You won’t pay income tax on 401(k) money until you withdraw it.

Tips to Help You Plan for Retirement

Want to create a financial plan that grows your money and provides for a secure retirement? You might benefit from talking to a financial advisor. Finding a financial advisor doesn’t have to be hard. 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.
Your retirement plan should account for medical expenses. One option to help you plan for medical costs is a health savings account (HSA). HSAs are tax-deferred just like 401(k) plans. However, you don’t have to pay any income taxes on withdrawals from an HSA as long as you use the withdrawals for medical expenses. Check out our guide to HSAs and whether you should consider one.