Taxes on traditional and Roth IRA and 401(k) withdrawals: What you should know

Retirement plans such as 401(k)s and IRAs are powerhouse savings accounts, giving you a tax break either when you contribute to the account or when you withdraw your money — plus taxes are deferred while the money grows.

But if you dip into your retirement savings early — which generally means anytime before you reach age 59 ½ — you may be required to pay tax on those distributions, plus a possible penalty of 10 percent or more of your withdrawal amount.

The biggest factor dictating the taxes you pay, besides your age when you take withdrawals, is whether you have a traditional or Roth account. That’s because you’ll typically be taxed on withdrawals from traditional accounts, whereas distributions from Roth IRAs and Roth 401(k)s are tax-free — unless you fail to abide by specific rules.

Understanding how you’ll be taxed on your retirement money is important, particularly if you have a mix of traditional and Roth retirement accounts. Below we dive into how the most common types of retirement accounts — traditional and Roth IRAs, and traditional and Roth 401(k)s — are taxed, both on early withdrawals as well as distributions once you’re in retirement.

Roth IRAs: Where you owe taxes at withdrawal time

To grasp how withdrawals occur from a traditional IRA When you access this account, your withdrawals will be subject to taxation, depending primarily on whether you have reached the age of 59 ½ or not at the time of withdrawal. If taken out prematurely—before reaching 59 years and six months—the tax implications for traditional IRAs differ significantly compared to those applied post-age-qualification.

Premature withdrawals from a conventional Individual Retirement Account (IRA)

If you're thinking about withdrawing funds from your IRA before reaching 59 ½ years old, be cautious: You'll probably have to pay taxes on the withdrawn sum and might also face a penalty. As a result, you’ll receive only part of what you took out.

What remains after taxes and penalties?

Imagine you take out $10,000 prematurely from your traditional IRA account.

- Your federal income tax bill may vary between approximately $1,000 and $3,700 based on your situation. federal income tax bracket You might also face an early withdrawal penalty of either 10 percent or $1,000 for this particular withdrawal.

- You may owe state income taxes and penalties, too (though there are 13 states that don’t tax retirement income ).

That means you’ll probably pay a minimum of $2,000 in taxes on this $10,000 withdrawal, and that’s only if you’re in the lowest income tax bracket and if your state doesn’t also tax that income.

The IRS imposes a penalty on early withdrawals to discourage savers from dipping into their retirement accounts early. That said, not all early withdrawals are subject to the 10 percent penalty, and the IRS allows some early distributions to be made penalty-free, including for certain types of hardships, to pay for qualified higher education expenses and to buy a first home.

Learn more: 8 ways to take penalty-free withdrawals from your IRA or 401(k)

Generally speaking, experts recommend that you explore alternative sources for money before withdrawing from your IRA, not least because doing so could mean you won’t have enough money come retirement. You can minimize penalties if your early withdrawal is among one of the IRS’ exemptions, and you adhere to any other caveats that apply. (See this IRS page for exceptions to tax on early withdrawals .)

Retirement distributions taken from a traditional IRA

Good news for those saving for retirement: with a traditional IRA, the IRS primarily focuses on your age when it comes to withdrawals. As soon as you reach 59 ½ years old, you're free to take out funds without facing penalties, regardless of whether you're still employed or intend to keep contributing to the account. This allows you to access these funds even while continuing your career.

If you withdraw funds from a traditional IRA when you're over 59 ½, those distributions will be considered regular income. This means your withdrawals might push you into a higher tax bracket. For instance, based on the projected tax brackets for 2025, these withdrawals could face taxes anywhere between 10% and 37%. Additionally, depending on where you live, you might have to pay state income tax on your IRA withdrawals too. (To find out more, visit) state income tax rates .)

There’s another age-related rule you need to be mindful of with a traditional IRA: You must begin making withdrawals in your 70s, in what’s known as a required minimum distribution (RMD) The precise age at which you're required to begin Required Minimum Distributions (RMDs) varies based on your birth date, but as of now, it stands at 73; however, for individuals born in 1960 or after, this requirement will increase to 75. Missing an RMD could result in a significant penalty—up to 25% of what was supposed to be withdrawn. However, if you rectify the mistake within two years, the fine reduces to 10%.

If the idea of paying taxes on the savings you've accumulated over many years feels unjust, remember this: You haven't paid taxes on your contributions yet, and the funds have been increasing without taxation.

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Roth IRAs: Taxes Paid at Withdrawal Time

Many savers choose this option because of Roth IRA compared to a Traditional IRA is because of the possibility of tax-free income in retirement. If you wait until age 59 ½ to begin making withdrawals, generally you won’t have to pay any federal income tax on this money — and that includes all the gains you’ve realized since you began contributing to a Roth IRA (but do read about the five-year rule, below).

Along with the benefit of tax-free withdrawals, another advantage of the Roth IRA Unlike a traditional IRA, you aren't required to begin taking mandatory distributions at a certain age. Additionally, if funds remain in the account upon your passing, they typically pass on to your beneficiaries without being subject to income tax.

Withdrawals made prematurely from a Roth IRA

While most experts advise against tapping into any retirement account early, you do have more room to make penalty-free withdrawals from a Roth IRA than from a traditional IRA. Because contributions to a Roth IRA are made with after-tax money, you can withdraw your contributions penalty- and tax-free at any age and for any reason.

Profits are subject to taxation when withdrawn prematurely from a Roth IRA. If you take money out of a Roth IRA before reaching 59 ½ years old, these profits could be treated as regular income and might incur a 10 percent additional tax for early withdrawal—unless an exception applies.

The last condition regarding Roth IRA withdrawals is this: If you withdraw your earnings less than five years after establishing the account, you might face a 10 percent penalty along with income tax on those earnings.

A distinct five-year rule is applicable to Roth IRA conversions as well. Rather than depending on when the account was initially opened, this five-year duration begins from the tax year during which the conversion takes place. Should you execute several conversions, each one must adhere to its individual five-year waiting period.

Roth IRA distributions during retirement

The five-year holding period rule for Roth IRAs still applies regardless of your age being over 59 ½; however, the key distinction is that only the earnings become liable to federal income tax—after reaching this age, the additional 10 percent penalty no longer applies.

If you've met the five-year holding requirement and you're over 59 ½ years old, withdrawals from your Roth IRA won't be taxed at either the federal or state level.

Conventional 401(k) plans: Taxes are applied when you make withdrawals.

The same principles pertain to taking money out of 401(k) plans and Individual Retirement Accounts (IRAs), with varying tax implications based on your age when making the withdrawal and whether you meet certain conditions. a traditional 401(k) or a Roth 401(k) .

Similar to IRAs, traditional 401(k) plans provide a tax advantage when you make contributions; essentially, your contributions to a traditional 401(k) lower your taxable income. taxable income , which in turn reduces your tax bill.

Early withdrawals from a traditional 401(k)

The withdrawal guidelines remain unchanged. traditional 401(k) And with a traditional IRA before reaching 59 ½ years old. Taxes will be owed on the withdrawn sum, along with an extra 10 percent penalty tax, unless you meet one of the exceptions provided by the IRS.

Although it's advisable to explore other funding options prior to withdrawing from retirement accounts prematurely, 401(k)s offer another option: You may opt for a loan against your account balance. 401(k) loan .

There are numerous Internal Revenue Service regulations to keep in mind when taking out a 401(k) loan, such as the requirement to repay the amount within five years. However, this timeline extends if you use the borrowed money for purchasing your main residence. Additionally, you can only obtain a loan from your present 401(k) plan if your employer allows it. Furthermore, maximum loan amount is either $50,000 or half of your vested account balance, whichever amount is smaller.

The benefit of taking out a 401(k) loan compared to an early withdrawal As long as the loan conditions are met, you won't have to worry about taxes or penalties. Additionally, a 401(k) loan does not necessitate a credit check and will not appear as debt on your credit record.

Withdrawals during retirement from a conventional 401(k) plan

After reaching the age of 59 ½, you may start withdrawing funds from your traditional 401(k) without facing penalties, although these distributions will be taxed at regular income tax rates. In 2025, those rates will fall between 10 percent and 37 percent.

Just like with traditional IRAs, funds in a traditional 401(k) must adhere to mandatory withdrawal rules known as Required Minimum Distributions (RMDs). Not taking these RMDs from your traditional 401(k) could result in a significant penalty—up to 25% of what was supposed to be withdrawn. However, you have the option to postpone starting these withdrawals. If you're still employed by the same employer This offers the strategy but you don't have ownership of five percent or more of the business.

Roth 401(k)s: You pay taxes when making withdrawals

Many employers are now providing both a Roth 401(k) and a conventional 401(k). This change has been facilitated by recent modifications implemented as part of the legislation. Secure Act 2.0 Now, your employer can make matching contributions to your Roth account, but keep in mind that these contributions are subject to taxation beforehand.

Just like with Roth IRAs, you can remove your contributions from a Roth 401(k) At any point without taxes, although income might be subject to taxation if you withdraw funds from the account prior to retiring.

Early withdrawals from a Roth 401(k)

The same basic rules apply to early withdrawals from a Roth 401(k) as from a Roth IRA: You can withdraw contributions penalty- and tax-free at any age and for any reason, though with a Roth 401(k), you can’t choose to withdraw solely your contributions. Instead, the amount of the withdrawal that consists of contributions vs. (potentially taxable) earnings is based on the ratio of total earnings to contributions in the account.

If you're withdrawing funds from a Roth 401(k) before turning 59½, the earnings you take out will be treated as regular income and could incur a 10% penalty fee—unless you qualify under specific exceptions. Similarly, if you withdraw money prematurely within five years of starting contributions to your Roth 401(k), you might face this same 10% penalty charge.

Ultimately, similar to a conventional 401(k), you might have the ability to obtain a loan from your Roth 401(k) -- provided all the regulations are met -- if such an option is made available by your employer.

Withdrawals from a Roth 401(k) upon retirement

The tax benefit of a Roth 401(k) can be really valuable come retirement. That’s because withdrawals are tax-free so long as you satisfy both of the criteria to be considered a “qualified distribution” by the IRS: at least five years have passed since your first contribution to your Roth 401(k) and you are 59 1/2 or older.

Beginning in 2024, RMDs no longer apply to Roth 401(k) accounts. And any money that remains after the account holder’s death is generally transferred to heirs tax-free.