What are the taxes on a 401(k) distribution?

How is a 401(k) withdrawal — also called a 401(k) distribution — taxed? The answer here depends on your situation and reason for taking a distribution. Whether you’re moving money to a new retirement plan, taking money out for retirement, or making a withdrawal to pay expenses, you’ll want to understand the tax implications of your 401(k) distribution.

Moving the money to a new plan, such as an Individual Retirement Account (IRA) or a new employer 401(k) is known as a rollover. This type of move can be taxable if the money is sent to you versus the financial institution.

• If you’re moving your retirement savings funds to a new plan through a direct rollover to a traditional IRA or a different 401(k), no tax withholding is necessary since the rollover isn’t taxable.
• If your plan is sending you the money first (an indirect rollover), there’s more to the story.

Find out more about both direct and indirect rollovers in our 401(k) rollover to IRA article. What if you’re not rolling over your 401(k), and it is simply time to use the funds from your retirement accounts? Read on and we’ll outline everything else you need to know about taxes on a 401(k) distribution.

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When can you withdraw from a 401(k)?

Retirement plans are designed so that you can use the money when you reach retirement. For this reason, rules restrict you from taking distributions before age 59½. You can take money out before you reach that age. However, an early withdrawal generally means you’ll have a 10% additional tax penalty unless you meet one of the exceptions, such as an emergency withdrawal of up to $1,000, if permitted by your plan.

If you’re taking out funds from your retirement account prior to age 59½ and exceptions apply, use IRS Form 5329 to report the amount of 10% additional tax you owe on an early distribution or to claim an exception to the 10% additional tax.

Find additional exceptions to the early withdrawal penalty in the Form 5329 Instructions.

401(k) distribution tax form

When you take a distribution from your 401(k), your retirement plan will send you a Form 1099-R. This tax form shows how much you withdrew overall and the federal and state taxes withheld from the distribution if applicable. This tax form for 401(k) distribution is sent when you’ve made a distribution of $10 or more.

How does a 401(k) withdrawal affect your tax return?

Once you start withdrawing from your traditional 401(k), your withdrawals are usually taxed as ordinary taxable income. That said, you’ll report the taxable part of your distribution directly on your Form 1040 for any tax year that you make a distribution.

Taxes on 401(k) withdrawal

The tax rate for your 401(k) distributions will depend on which federal tax bracket you are in at the time of withdrawal. You have to pay taxes on the money you withdraw because you didn’t pay income taxes on it when you contributed (put money into the account). Here are some important reminders when it comes to 401(k) withdrawal rules:

• If you are retired, you have to start taking a required minimum distribution from your Traditional 401(k) account at a certain age. Find out more about Required Minimum Distribution rules.
• If you don’t take the required minimum distribution, the Internal Revenue Service can assess a penalty of 25% of the amount not distributed. The penalty may be reduced to 10% if you take a corrective distribution and meet other requirements.
• You can withdraw more than the minimum from your 401(k) plan.
• There are special calculations if you paid taxes on part of your contributions to a traditional 401(k).

Keep in mind, the tax considerations for a Roth 401(k) or Roth IRA are different. To see the difference side-by-side, check out this table from the IRS.

Do you pay taxes twice on 401(k) withdrawals?

We see this question on occasion and understand why it may seem this way. But, no, you don’t pay income tax twice on 401(k) withdrawals. With the 20% withholding on your distribution, you’re essentially paying part of your taxes upfront.

Depending on your tax situation, the amount withheld might not be enough to cover your full tax liability. In that case, you’ll have to pay the rest of the tax when you file your return.

If the opposite is true and you’ve paid more than you owe, you’ll get a little back at tax time. Either way, you would not pay the same tax twice on your 401(k) withdrawal.

Does a 401(k) withdrawal affect your Social Security benefits?

The short answer is no, taking a distribution from your 401(k) does not impact your eligibility for (or the amount of) your Social Security benefits. Since a 401(k) comes from an employer and Social Security comes from the government, these two sources of income are completely separate. However, a 401(k) withdrawal can affect your adjusted gross income (AGI) and therefore how much of your Social Security is taxed.

Need more help navigating 401(k) distribution taxes or other retirement account questions?

Tax laws for retirement savings accounts can get complicated. Get help! Whether you use a tax pro at one of our H&R Block office locations or file online, we can help you maximize your tax savings.