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

Understanding the tax implications of withdrawing money from your 401(k) is crucial to avoid unexpected financial burdens interfering with your retirement plans. Generally, withdrawals from a traditional 401(k) are subject to ordinary income tax rates, which means the amount you withdraw gets added to your taxable income for the year. This can potentially push you into a higher tax bracket, depending on your total income, resulting in a bigger tax bill overall.

To optimize your 401(k) withdrawals and develop a tax-efficient retirement income strategy, consider speaking 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: 401(k) withdrawals are subject to income tax.

When you start taking distributions, usually after age 59 ½, 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.

The rules differ for Roth 401(k) plans: Since contributions are made with after-tax dollars, qualified distributions are generally tax-free.

How Tax Advantages Work During the Growth Phase

Retirement accounts like 401(k) plans 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 401(k) contribution limits. In 2025, you can contribute up to $23,500 to a 401(k) (or $31,000 if you’re 50 or older).

Under the SECURE 2.0 Act, beginning in 2025, employees aged 60 to 63 can benefit from an increased super catch-up contribution limit. The enhanced limit is $11,250, compared to the standard $7,500. This means that those in the target age range can contribute a total of $34,750 to their 401(k) in 2025.

When Can You Start Making Withdrawals?

You can begin withdrawing from your 401(k) without paying the 10% early withdrawal penalty once you reach age 59 ½. If you don’t need the money right away, you can keep it invested until required minimum distributions (RMDs) begin.

Under current law, RMDs start at age 73 for people born between 1951 and 1959, and at 75 for those born in 1960 or later. These withdrawals are mandated by the IRS to make sure tax-deferred savings in traditional 401(k)s eventually become taxable income.

RMD amounts are based on your account balance as of December 31 of the prior year and your life expectancy as defined by IRS tables. Each year, the percentage you must withdraw increases slightly as you age. If you’re still working past your RMD age, you may be able to delay RMDs from your current employer’s 401(k) until retirement, as long as you don’t own more than 5% of the company.

To calculate your RMD, simply divide the account balance by the IRS life expectancy factor that corresponds with your age. For example, if you’re 75, you would divide your account balance (as of December 31 of the previous year) by 24.6.

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

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

$--

RMD Amount for 401(k) #1

$--

RMD Amount for 401(k) #2

$--

About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

What Happens When You Start Withdrawing Funds?

The tax-deferred benefit of a 401(k) 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.

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 that 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.)

To better plan ahead, you can calculate how much you’ll owe for income tax. 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 ½ years of age. Though the account is designed to be part of your retirement plan, circumstances may arise 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 that some people cover with 401(k) funds.

If you choose to withdraw money from your 401(k) early, expect to pay a 10% penalty, which will apply on top of the income tax you’ll pay for withdrawing the funds. Remember, even if the funds are used to pay for an emergency, the withdrawal is still counted for tax purposes as income. You’ll want to run the numbers, adding the tax and penalty tax, to see if it actually 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, however, there is an exception to the 10% additional tax. The IRS lists the circumstances where the tax doesn’t apply, such as losing your job at 55 or starting a SOSEPP (series of substantially equal periodic payments) plan. You’d still owe 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 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 to determine the best course of action for your specific situation.

If you happen to hold stock in your company within your 401(k) account, one possibility is to 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’d 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 ½ , 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.

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.