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401(k) Taxes on Contributions and Withdrawals in 2025-2026

Contributing to a traditional 401(k) could reduce your tax bill now, but you’ll likely pay tax when you withdraw the money in retirement.

Tina Orem
June Sham
Lei Han
Updated
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 tax-deferred. This means you won't pay income taxes on the money until you withdraw it from the account.

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.
  2. The contributions can reduce your adjusted gross income. If you have an employer match, that money won't be taxed either.
For example, 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?

  • The contribution limit is $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250.
  • 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 the money you contribute 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.
» Use our 401k calculator to see if you're on track for retirement

Taxes on 401(k) withdrawals

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

Traditional 401(k) withdrawals are taxedas regular income in the year you take the money out. The tax rate depends on which federal tax bracket(s) you're in at the time of the withdrawal.
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. (You didn't pay income taxes on it back when you put it in the account.)
A few important points:
  • You can withdraw more than the minimum.
» MORE: Calculate how long your retirement savings might last

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. 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. 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 allows special emergency 401(k) distributions of up to $1,000 per year without the 10% penalty. The taxpayer can pay the $1,000 back over a three-year period, and no other distributions can be made in that three-year period until the money is repaid.
» Dive deeper: How 401(k) withdrawals and penalties work

Traditional vs. Roth 401(k) taxes

The main difference between a traditional 401(k) and a Roth 401(k) is tax treatment. Contributions to a traditional 401(k) are made with pre-tax income; contributions to a Roth 401(k) are made with post-tax income. This means that contributions to a Roth 401(k) won’t lower your taxable income. However, because you paid taxes on the money before it went into your account, you can withdraw the contributions tax-free later.
» 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 a 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.
» MORE: See our picks for the best financial advisors
Roth 401(k)
Traditional 401(k)
Contribution limits
The 401(k) contribution limit applies to both accounts. You can contribute to both accounts in the same year, as long as you keep your total contributions under the cap. You can contribute $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250.
Tax treatment of contributions
Contributions are made after taxes, with no effect on current adjusted gross income. Employer matching dollars must go into a pretax account and are taxed when distributed.
Contributions are made pretax, which reduces your current adjusted gross income.
Tax treatment of withdrawals
No taxes on qualified distributions in retirement.
Distributions in retirement are taxed as ordinary income.
Withdrawal rules
Withdrawals of contributions and earnings are not taxed as long as the distribution is considered qualified by the IRS: The account has been held for five years or more and the distribution is:
  • Due to disability or death.
  • On or after age 59 ½.
Unlike a Roth IRA, you cannot withdraw contributions any time you choose.
Withdrawals of contributions and earnings are taxed. Distributions may be penalized if taken before age 59 ½, unless you meet one of the IRS exceptions.

7 ways to reduce your 401(k) taxes

  1. Wait to withdraw. If you can, consider staying out of your 401(k) account. Withdrawals, especially early ones, can trigger taxes and penalties.
  2. Look for exceptions. If you must make an early withdrawal from a 401(k), see if you qualify for an exception that will help you avoid paying an early withdrawal penalty.
  3. Consider credits. See if you qualify for the saver’s credit on your contributions.
  4. Know the rules about 401(k) rollovers. Rolling a 401(k) account into another 401(k), or into an IRA, usually won’t trigger taxes — if you get the money into the new account within 60 days of when you withdraw the money. Otherwise, the IRS might consider the move a distribution, triggering taxes and maybe even a penalty.
  5. Weigh taking a 401(k) loan vs. a withdrawal. In most circumstances, you’ll need to repay the loan within three to five years and make regular payments. And not all 401(k) plans offer loans. Check with your plan administrator for the rules.
  6. Explore tax-loss harvesting. You might be able to offset the taxes on your 401(k) withdrawal by selling underperforming securities at a loss in another investment account you might have. Those losses can offset some or all of the taxes on your 401(k) withdrawal through a strategy called tax-loss harvesting.
  7. See a tax professional. There are other ways to minimize your 401(k) taxes, too. A qualified tax pro can discuss your options with you.
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