Does 401(k) Withdrawal Count as Income for Taxes?

Yes. A withdrawal from a 401(k) generally counts as income for tax purposes: money you pull from a traditional 401(k) is added to your other income for the year and taxed at your ordinary rate, because you never paid tax on those contributions or their growth while they sat in the account.¹ Roth 401(k) withdrawals follow a different rule, and a few moves — like rollovers and loans — don’t count as income at all. The details decide what you actually owe.

How a Traditional 401(k) Withdrawal Gets Taxed

Traditional 401(k) contributions go in before tax. Your W-2 leaves elective deferrals out of taxable wages, and the investments grow without annual tax drag.² The IRS collects when the money comes out.

The full withdrawal is stacked on top of your wages, interest, freelance earnings, and everything else that flows into adjusted gross income. It’s then taxed at your marginal rate, the same way a paycheck is.³ A large distribution can push part of your income into a higher bracket for that year, which is why a lump sum often carries a bigger tax cost than the same amount spread across several years.

Hardship withdrawals get no break here. Even when a plan lets you tap the account for a financial emergency, the full amount is still ordinary income, and the 10% early withdrawal tax may apply on top.⁴

When a Roth 401(k) Withdrawal Counts as Income

Roth 401(k) contributions are made with money that’s already been taxed. Your original contributions come back to you tax-free.⁵ The earnings are the piece that can still be taxable.

Earnings escape tax when the withdrawal is a “qualified distribution.” Two conditions have to be met at once. At least five tax years must have passed since your first Roth contribution to the plan, and you must be 59½ or older, permanently disabled, or deceased (with the funds paid to a beneficiary).⁶ Meet both, and nothing is income.

If the withdrawal doesn’t qualify, only the earnings portion is taxable income; the contribution portion still comes out tax-free. The split shows up on your 1099-R.⁵

The 10% Early Withdrawal Penalty

Income tax isn’t the only cost if you’re under 59½. The IRS adds a 10% additional tax on the taxable portion of an early distribution — the full amount for a traditional 401(k), or the earnings piece for a non-qualified Roth withdrawal.⁷

This 10% isn’t withheld automatically. You calculate it and pay it when you file your return.⁸ Between federal income tax at your marginal rate, the 10% penalty, and state tax, an early withdrawal can lose a third or more before it reaches your bank account.

Exceptions to the 10% Penalty

Certain situations remove the 10% penalty. They don’t remove the income tax — the withdrawal still counts as income — they just strip out the penalty layer. The SECURE 2.0 Act added several of these starting in 2024. The following exceptions apply to 401(k) distributions:⁹

Separation from service in or after the year you turn 55, from that employer’s plan. Public safety employees of state or local governments qualify at 50. Older 401(k)s from previous employers aren’t covered.
Permanent disability, meaning a condition a doctor expects to last indefinitely or result in death.
Death, for distributions to your beneficiary or estate.
A qualified domestic relations order, typically in a divorce.
Unreimbursed medical expenses that exceed 7.5% of your AGI, but only the portion above that floor.
A schedule of substantially equal periodic payments based on life expectancy, once properly established.
Birth or adoption expenses, up to $5,000 per child, taken within one year of the birth or finalization.
Terminal illness, once certified by a physician.
Domestic abuse by a spouse or domestic partner, up to the lesser of $10,000 or 50% of the account.
One emergency personal expense distribution per calendar year, up to the lesser of $1,000 or the vested balance above $1,000.
An IRS levy against the retirement account to collect a tax debt.

Moves That Don’t Count as Income

Rollovers

Moving 401(k) money into another eligible retirement account — another employer’s 401(k) or an IRA — isn’t a taxable distribution. A direct rollover, where the plan sends the funds straight to the new account, is the cleanest path. Nothing is withheld and there’s no clock to watch.¹⁰

An indirect rollover, where the check comes to you first, is riskier. The plan withholds 20% for taxes, and you have 60 days to deposit the full original amount into the new account, replacing that 20% out of pocket. Miss the deadline, and the entire distribution becomes taxable income, plus the 10% penalty if you’re under 59½.¹⁰

401(k) Loans

A loan from your own 401(k) isn’t a distribution. It’s not taxable income, and no 10% penalty applies. The exposure is what happens if the loan goes bad. Default on the payments, or leave the job before it’s paid off when the plan requires full repayment, and the unpaid balance becomes a “deemed distribution” — taxed as income and potentially hit with the 10% penalty if you’re under 59½.¹¹

Required Minimum Distributions

Traditional 401(k) money can’t stay in the plan indefinitely. Once you reach age 73, the IRS requires annual minimum distributions.¹² Every dollar of an RMD counts as ordinary taxable income.

Missing or shorting an RMD triggers a 25% excise tax on the amount you should have taken. The penalty drops to 10% if you correct the shortfall within two years.¹² Starting in 2024, designated Roth accounts in employer plans no longer have to take RMDs during the account owner’s lifetime.

How the Added Income Ripples Into Other Benefits

Because a 401(k) withdrawal raises your AGI, it can quietly increase costs on benefits that use income as a measuring stick.

Social Security

If you’re drawing Social Security while taking 401(k) distributions, a larger share of those benefits can become taxable. The IRS looks at “combined income” — AGI, plus nontaxable interest, plus half your Social Security. Single filers above $25,000 combined income may owe tax on up to 85% of benefits; the joint threshold is $32,000.¹³ A distribution that pushes you past those lines effectively taxes part of your Social Security too.

Medicare Premiums

Medicare Part B and Part D premiums rise for higher-income beneficiaries through income-related monthly adjustment amounts (IRMAA). Social Security uses your return from two years earlier to set the surcharge, so a big withdrawal today can raise your Medicare premium two years out.¹⁴

ACA Premium Tax Credits

If you buy coverage through the Marketplace before Medicare eligibility, your 401(k) withdrawal counts toward the income used to calculate premium subsidies. Traditional 401(k) and IRA withdrawals are included; qualified Roth distributions are not.¹⁵ A distribution can shrink or eliminate your premium tax credit for the year.

State Income Tax

Most states treat 401(k) distributions as taxable income the same way the IRS does, with rates that run from roughly 2% to more than 13%. Nine states have no state income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. A handful of others offer partial exemptions for retirement income based on age or amount. It’s worth checking your state’s specific rules before pulling a large sum.

Withholding and Reporting

On a distribution that could have been rolled over, the plan is required to withhold 20% for federal income tax, and you can’t opt out.¹⁶ That 20% is a prepayment against the total tax you owe; if your actual rate is lower, the difference comes back as a refund.

If your marginal rate plus the 10% penalty adds up to more than 20%, the mandatory withholding won’t cover the bill. You may need to make an estimated tax payment or bump up withholding elsewhere to avoid an underpayment penalty. The IRS generally waives that penalty if your total withholding and estimated payments cover at least 90% of the current year’s tax or 100% of the prior year’s.¹⁷

The plan reports every distribution to you and to the IRS on Form 1099-R. Box 1 shows the gross distribution, Box 2a shows the taxable amount, and Box 7 carries a code identifying the type of withdrawal, which tells the IRS whether the 10% additional tax should apply.¹⁸ That form is what you use to report the withdrawal on your 1040, and the withholding it shows gets reconciled against your total tax when you file.

1
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
2
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – 401(k) Plan Overview
3
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
4
Internal Revenue Service. 401(k) Plan Hardship Distributions – Consider the Consequences
5
Internal Revenue Service. Roth Account in Your Retirement Plan
6
Internal Revenue Service. Retirement Topics – Designated Roth Account
7
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
8
Internal Revenue Service. Substantially Equal Periodic Payments
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
11
Internal Revenue Service. Considering a Loan From Your 401(k) Plan?
12
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
13
Social Security Administration. Must I Pay Taxes on Social Security Benefits?
14
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
15
HealthCare.gov. What’s Included as Income
16
Internal Revenue Service. Pensions and Annuity Withholding
17
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
18
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.