401(k) Taxes on Withdrawals and Contributions

All 401(k) plans offer specific tax advantages, making them a great way to save for retirement. Contributions to a traditional 401(k) plan, as well as any employer matches and earnings in the account (such as gains, interest or dividends), are considered tax-deferred. This means you won't pay income taxes until you withdraw from the account.

But how exactly do 401(k) taxes work, and how do you pay them? Here are a few rules.

» Use our 401k calculator to see if you're on track for retirement

Taxes on 401(k) contributions

Are 401(k) contributions tax-deductible?

Contributions to your traditional 401(k) come out of your paycheck before the IRS takes its cut. This is also known as "pretax income," and it means two things: 1) you won’t pay income tax on those contributions, and 2) the contributions can reduce your adjusted gross income. If you have an employer match, that money won't be taxed either.

An example of how this works: If you earn $50,000 before taxes and contribute $2,000 of it to your 401(k), that's $2,000 less you'll be taxed on. When you file your tax return, you’d report $48,000 rather than $50,000.

What else should I know about traditional 401(k) contributions?

• In 2024, you can contribute up to $23,000 a year to a 401(k) plan. If you're 50 or older, you can contribute up to $30,500.

• The 401(k) contribution limit rises to $23,500 for 2025, and people 50-plus can contribute up to $31,000. Due to the Secure 2.0 Act, people ages 60 to 63 have a higher catch-up contribution of $11,250 in 2025.

• The annual contribution limit is per person and applies to all of your 401(k) account contributions in total.

• You still have to pay some FICA taxes (Medicare and Social Security) on your payroll contributions to a 401(k).

• Your employer will send you a W-2 in January that shows how much it paid you during the previous calendar year, as well as how much you contributed to your 401(k) and how much withholding tax you paid.

Taxes on 401(k) withdrawals

What is the tax rate on 401(k) withdrawals?

The money you withdraw (also called a “distribution”) from a traditional 401(k) is taxable as regular income in the year you take the money out.

You can begin withdrawing money from your traditional 401(k) without penalty when you turn 59 ½ — but you still have to pay taxes on the withdrawal because you didn't pay income taxes on it back when you put it in the account. The rate at which your distributions are taxed will depend on which federal tax bracket(s) you're in at the time of your qualified withdrawal.

A few important points:

• If you’ve retired, you have to start taking required minimum distributions from your traditional 401(k) account when you're 73.

• If you don’t take the required minimum distribution when you’re supposed to, the IRS can assess a penalty of 10% to 25% of the amount not distributed^[0]

  Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs. Accessed May 8, 2024.

  View all sources

  .

• You can withdraw more than the minimum.

» MORE: Find out which tax bracket you're in

What if you withdraw from your 401(k) early?

For traditional 401(k)s, there are three main consequences of an early withdrawal or cashing out before age 59 ½:

1. Taxes will be withheld. The IRS generally requires automatic withholding of 20% of a 401(k) early withdrawal for taxes^[0]

   Internal Revenue Service. 401(k) Resource Guide - Plan Participants - General Distribution Rules. Accessed May 9, 2024.

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   . So, if you withdraw $10,000 from your 401(k) at age 40, you may get only about $8,000.

2. The IRS will penalize you. If you withdraw money from your 401(k) before you’re 59 ½, the IRS usually assesses a 10% penalty when you file your tax return^[0]

   Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs. Accessed May 9, 2024.

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   . That could mean giving the government an additional $1,000 of that $10,000 withdrawal.

3. You will have less money for retirement, especially if the market is down when you start making withdrawals. That could have long-term consequences.

There are exceptions to the IRS’ penalty for early withdrawals from a traditional 401(k) if you:

• Receive the payout over time.

• Qualify for a hardship distribution with the plan administrator.

• Leave your job and are over a certain age.

• Are a survivor of domestic abuse.

• Are getting divorced.

• Give birth to a child or adopt a child.

• Are or become disabled.

• Put the money in another retirement account.

• Use the money to pay an IRS levy.

• Use the money to pay certain medical expenses.

• Were a victim of a disaster.

• Overcontributed to your 401(k).

• Were in the military.

• Are terminally ill.

• Die.

Finally, a provision in the Secure 2.0 Act now allows special emergency 401(k) distributions of up to $1,000 per year without the 10% penalty^[0]

» Dive deeper: How 401(k) withdrawals and penalties work

Traditional vs. Roth 401(k) taxes

A Roth 401(k) is funded by post-tax income. This means, unlike a traditional or pretax 401(k), your contributions won’t lower your taxable income when you file. Instead, because you'll pay taxes on the money before it goes into your account, you can withdraw the contributions tax-free later. Fidelity, one of the biggest retirement plan providers, says nearly 80% of its plans now have a Roth 401(k) option^[0]

» Learn more about Roth 401(k)s vs. traditional 401(k)s

What else should I know about Roth 401(k) taxes?

• You can begin withdrawing money from your Roth 401(k) without penalty once you’ve held the account for at least five years and you’re at least 59 ½.

• You can withdraw contributions from a Roth 401(k) early if you’ve held the account for at least five years and need the money due to disability or death.

• Roth 401(k)s no longer require taking RMDs as of January 2024.

• A Roth 401(k) might be something to consider if you think you'll be in a higher tax bracket once you reach retirement age.

7 ways to reduce your 401(k) taxes