Understanding how much you’ll be taxed on your 401(k) is crucial for planning your retirement strategy. When you contribute to a traditional 401(k), the money is deducted from your paycheck before taxes, lowering your current taxable income. This means you won’t pay income tax on that money until you withdraw it in retirement. However, when you withdraw from a traditional 401(k), you’ll be taxed at your ordinary income tax rate, which may be higher than it was when you contributed to the account. On the other hand, Roth 401(k) contributions are made with after-tax dollars, so you won’t save on current taxes, but withdrawals in retirement are tax-free.
Federal Income Tax on 401k Withdrawals
When you withdraw money from your 401k, you will be subject to federal income tax. The amount of tax you pay depends on how old you are when you withdraw the money, and whether or not you made non-deductible contributions to your 401k. However, there are some exceptions, including withdrawals that are made after age 59 1/2, or made to pay for certain expenses, such as medical expenses or education.
Withdrawals Before Age 59 1/2
- If you withdraw money from your 401k before you turn 59 1/2, you will be subject to a 10% early withdrawal penalty, in addition to income tax.
- The early withdrawal penalty is applied to the amount of money you withdraw, minus any portion that was contributed on a post-tax basis.
- For example, if you withdraw \$10,000 from your 401k before you turn 59 1/2, and you contributed \$2,000 of that amount on a post-tax basis, you would be subject to a 10% penalty on \$8,000, or \$800.
Withdrawals After Age 59 1/2
- If you withdraw money from your 401k after you turn 59 1/2, you will not be subject to the early withdrawal penalty.
- However, you will still be subject to income tax on the amount you withdraw.
Non-Deductible Contributions
- If you made non-deductible contributions to your 401k, you will not be taxed on those contributions when you withdraw them.
- However, you will be taxed on the earnings that those contributions generated.
Exceptions to the Early Withdrawal Penalty
There are a few exceptions to the early withdrawal penalty. These exceptions include:
- Withdrawals that are made after age 59 1/2.
- Withdrawals that are made to pay for medical expenses.
- Withdrawals that are made to pay for education expenses.
- Withdrawals that are made to pay for the purchase of a first home.
- Withdrawals that are made to pay for certain other expenses, such as funeral expenses or disability expenses.
Table of Federal Income Tax Rates on 401k Withdrawals
The following table shows the federal income tax rates that apply to 401k withdrawals:
| Income | Tax Rate |
|---|---|
| 0 – $10,275 | 10% |
| $10,275 – $41,775 | 12% |
| $41,775 – $89,075 | 22% |
| $89,075 – $170,050 | 24% |
| $170,050 – $215,950 | 32% |
| $215,950 – $539,900 | 35% |
| Over $539,900 | 37% |
## State and Local Taxes on 401k Withdrawals
Withdrawals from a 401k are subject to state and local income taxes. The amount of tax you’ll pay depends on the tax rate in your state and locality.
Most states treat withdrawals from a 401k as ordinary income. This means that they will be taxed at the same rate as your other income. However, some states have special rules for 401k withdrawals. For example, some states offer a deduction for 401k contributions, which can reduce the amount of tax you pay on withdrawals.
If you are not sure how your state taxes 401k withdrawals, you can contact your state’s tax agency.
### Table of State Income Tax Rates on 401k Withdrawals
The following table shows the state income tax rates on 401k withdrawals for all 50 states and the District of Columbia.
| State | Tax Rate |
|---|---|
| Alabama | 5% |
| Alaska | 0% |
| Arizona | 4.54% |
| Arkansas | 6.65% |
| California | 1%–13.3% |
| Colorado | 4.55% |
| Connecticut | 6.99% |
| Delaware | 6.6% |
| District of Columbia | 8.95% |
| Florida | 0% |
| Georgia | 5.75% |
| Hawaii | 5.25% |
| Idaho | 0% |
| Illinois | 4.95% |
| Indiana | 3.23% |
| Iowa | 5.7% |
| Kansas | 4.6% |
| Kentucky | 6% |
| Louisiana | 4% |
| Maine | 5.2% |
| Maryland | 5.75% |
| Massachusetts | 5% |
| Michigan | 4.25% |
| Minnesota | 5.35% |
| Mississippi | 5% |
| Missouri | 5.4% |
| Montana | 0% |
| Nebraska | 5% |
| Nevada | 0% |
| New Hampshire | 0% |
| New Jersey | 6.37% |
| New Mexico | 4.75% |
| New York | 4%–8.82% |
| North Carolina | 5.25% |
| North Dakota | 0% |
| Ohio | 4.997% |
| Oklahoma | 5% |
| Oregon | 9% |
| Pennsylvania | 3.07% |
| Rhode Island | 3.75% |
| South Carolina | 5% |
| South Dakota | 0% |
| Tennessee | 0% |
| Texas | 0% |
| Utah | 0% |
| Vermont | 3.55% |
| Virginia | 5.75% |
| Washington | 0% |
| West Virginia | 6.5% |
| Wisconsin | 5.75% |
| Wyoming | 0% |
Early Withdrawal Penalty Tax
When you withdraw money from your 401(k) before you reach age 59½, you may have to pay an early withdrawal penalty tax. The penalty is 10% of the amount you withdraw. However, there are some exceptions to the penalty. You do not have to pay the penalty if you:
- Use the money to pay for qualified education expenses
- Use the money to pay for medical expenses that are more than 7.5% of your adjusted gross income
- Use the money to pay for the costs of a disability
- Use the money to pay for the costs of a first-time home purchase (up to $10,000)
- Use the money to pay for the costs of a birth or adoption
- Use the money to pay for the costs of a qualified reservist distribution
- Use the money to pay for the costs of a federal disaster distribution
If you are not sure whether you qualify for an exception to the early withdrawal penalty, you should consult with a tax professional.
The following table shows the amount of tax you will have to pay if you withdraw money from your 401(k) before you reach age 59½:
| Amount Withdrawn | Penalty Tax |
|---|---|
| $1,000 | $100 |
| $5,000 | $500 |
| $10,000 | $1,000 |
| $20,000 | $2,000 |
| $50,000 | $5,000 |
Required Minimum Distributions Tax
Required Minimum Distributions (RMDs) are the minimum amount that you must withdraw from your 401(k) account each year once you reach age 72. The amount of your RMD is based on your account balance and your life expectancy. The IRS taxes RMDs as ordinary income, which means they are taxed at your regular income tax rate.
If you do not withdraw the required amount from your 401(k) account, you will be subject to a 50% penalty tax on the amount that you should have withdrawn.
Here is a table that shows the RMD rates for different ages:
| Age | RMD Rate |
|---|---|
| 72 | 3.65% |
| 73 | 3.86% |
| 74 | 4.08% |
| 75 | 4.30% |
| 76 | 4.53% |
| 77 | 4.77% |
| 78 | 5.02% |
| 79 | 5.28% |
| 80 | 5.56% |
| 81 | 5.85% |
| 82 | 6.16% |
| 83 | 6.49% |
| 84 | 6.84% |
| 85 | 7.21% |
| 86 | 7.61% |
| 87 | 8.04% |
| 88 | 8.50% |
| 89 | 8.99% |
| 90+ | 9.51% |
If you have multiple 401(k) accounts, you must calculate your RMD for each account separately. You can withdraw the RMD from any of your 401(k) accounts, but you cannot withdraw it from an IRA.
If you are still working and have not yet reached age 59½, you can avoid the 10% early withdrawal penalty by rolling over your 401(k) account to an IRA. However, you will still be subject to income tax on the amount that you withdraw from the IRA.
Well, there you have it, folks! Now you know how much they’ll be taking from your hard-earned retirement savings. But hey, don’t let it get you down. Remember, saving for the future is still worth it, even with the taxes. Thanks for reading, and be sure to check back later for more money-centric wisdom. We’ve got your back every step of the way to financial freedom!