How 401(k) Withdrawals Are Taxed (2026)

Withdrawals are ordinary income, not capital gains

Money in a traditional 401(k), 403(b), or 457(b) has never been taxed — contributions went in pre-tax and growth was deferred. So when it comes out, the entire withdrawal (contributions and earnings alike) is added to your taxable income for the year and taxed at your regular federal bracket, the same as wages. There's no capital-gains treatment, no matter how much of the balance is investment growth.

That means the tax on a withdrawal depends on everything else on your return that year. A $30,000 withdrawal on top of a salary can land in the 22% or 24% bracket; the same $30,000 taken in a no-income year might be taxed mostly at 10–12%. Most states with an income tax also tax the withdrawal, though several exempt some or all retirement income.

The 10% early-withdrawal penalty before 59½

If you take a distribution before age 59½, the IRS adds a 10% additional tax on the taxable amount, on top of ordinary income tax. Withdraw $20,000 early in the 22% bracket with a 5% state tax and you can lose roughly 37% — $7,400 — to taxes and penalty combined. The penalty is reported on Form 5329, which is also where you claim an exception.

Exceptions that erase the penalty

The income tax always applies to traditional-account withdrawals, but the 10% penalty disappears in more situations than most people expect:

• Rule of 55: you leave your job (quit, fired, or retired) in or after the calendar year you turn 55, and withdraw from that employer's plan — not an IRA, and not an old plan from a previous job. Public-safety employees qualify at 50.
• SEPP / 72(t) payments: substantially equal periodic payments based on your life expectancy, at any age, if you commit to the schedule for 5 years or until 59½, whichever is longer.
• Disability (total and permanent) or death (distributions to your beneficiary).
• Medical expenses above 7.5% of adjusted gross income.
• QDRO: money paid to an ex-spouse under a qualified domestic relations order.
• Newer SECURE 2.0 exceptions: up to $5,000 for a birth or adoption, terminal illness, federally declared disaster distributions, a $1,000-per-year personal emergency withdrawal, and distributions for victims of domestic abuse.

The 457(b) loophole

Governmental 457(b) plans — common for state and local government employees — are not subject to the 10% early withdrawal penalty at all once you've separated from service. Leave the job at 45 and withdraw at 46, and you owe ordinary income tax but no penalty. This only covers money contributed to the 457(b); funds rolled into it from a 401(k) or IRA keep their penalty rules. It's a major reason to think twice before rolling a 457(b) into an IRA, which would forfeit the exemption.

The 20% withholding is not your tax rate

When a plan pays a distribution directly to you, it must withhold 20% federal tax. Two traps hide in that rule. First, 20% is just a prepayment — if the withdrawal pushes you into a higher bracket (or adds the 10% penalty) you'll owe more at filing; in a low bracket you'll get some back. Second, if you meant to roll the money over yourself within 60 days, you have to come up with the withheld 20% from other cash to complete a full rollover, or the shortfall counts as a taxable — possibly penalized — distribution.

A direct (trustee-to-trustee) rollover to an IRA or your new employer's plan sidesteps all of it: no withholding, no tax, no penalty, and the money keeps growing tax-deferred.

403(b) plans: same rules as 401(k)s

For withdrawal taxation, a 403(b) — the 401(k) cousin for schools, hospitals, and nonprofits — follows the same playbook: ordinary income tax, 10% penalty before 59½, the same exception list including the rule of 55, and the same 20% withholding on distributions paid to you. Roth 403(b) accounts mirror Roth 401(k)s: qualified withdrawals (age 59½ plus a 5-year-old account) are entirely tax-free.

How to shrink the tax bill

• Wait for 59½ — or use the rule of 55 instead of paying 10% unnecessarily.
• Spread withdrawals across years to avoid stacking one big distribution into a high bracket.
• Use low-income years (early retirement, a sabbatical, a job gap) for withdrawals or Roth conversions at 10–12% rates.
• Mind the interaction effects: large withdrawals can make more of your Social Security taxable and trigger Medicare IRMAA surcharges two years later.
• Sequence your accounts: which account you tap first — taxable, tax-deferred, or Roth — changes lifetime taxes materially.

Frequently asked questions

How much tax will I pay on a 401(k) withdrawal?

The withdrawal is added to your taxable income and taxed at your ordinary federal bracket (10–37%), plus state income tax in most states, plus a 10% federal penalty if you're under 59½ and no exception applies. There's no single rate — it depends on your total income that year.

What is the penalty for withdrawing from a 401(k) early?

10% of the taxable amount, on top of regular income tax, reported on Form 5329. Exceptions include leaving your job in or after the year you turn 55, disability, SEPP/72(t) payments, large medical expenses, QDROs, and several SECURE 2.0 carve-outs like the $5,000 birth-or-adoption withdrawal.

Are 403(b) withdrawals taxed like 401(k) withdrawals?

Yes — identically. Traditional 403(b) withdrawals are ordinary income, the 10% pre-59½ penalty and its exceptions apply the same way, and Roth 403(b) qualified withdrawals are tax-free.

Do 457(b) withdrawals have an early-withdrawal penalty?

Governmental 457(b) plans don't — once you separate from the employer, withdrawals at any age skip the 10% penalty (you still owe ordinary income tax). Money rolled into the 457(b) from other plan types keeps its original penalty rules.

Is the 20% withholding the same as the tax I owe?

No. The 20% withheld from a distribution paid to you is a prepayment. Your actual tax is figured on your return — often more than 20% once the penalty and state tax stack on, or less if you're in a low bracket, in which case you get a refund.

How do I avoid taxes on a 401(k) withdrawal entirely?

A direct rollover to an IRA or new employer's plan is tax-free, as are qualified withdrawals from Roth accounts. For traditional money you plan to spend, you can't avoid the income tax — only manage the rate by timing withdrawals into lower-income years.

Put a number on it

• Tax-Aware Withdrawal Calculator — see which account to tap first and what it costs in tax.
• Retirement Drawdown Calculator — project how long your balance lasts at a given withdrawal rate.
• Which Accounts to Draw Down First — the order that minimizes lifetime taxes.
• The Roth Conversion Ladder — a penalty-free way to reach 401(k) money before 59½.