How to withdraw money from a 401(k), step by step
A cash payment from a 401(k) arrives with 20 % already taken for federal income tax, and that 20 % is almost never the tax you really owe.
Still to pay at tax time
$3,600
$6,000 withheld (20 %), $9,600 really owed in federal tax and penalty.
| Check you receive | $24,000 |
| Federal income tax | $6,600 |
| 10 % additional tax | $3,000 |
| Marginal rate reached | 22 % |
Worked out by Radif Partners · How we calculate · figures read on irs.gov and healthcare.gov · not personal financial advice
To withdraw money from a 401(k) you ask the plan administrator for a distribution, choose between a payment to yourself and a direct rollover, and settle the tax on your return the next spring. If the payment comes to you and is an eligible rollover distribution, the plan must withhold 20 % for federal income tax, even when you plan to roll it over later; a direct rollover to an IRA or another plan has no withholding. The plan then sends Form 1099-R, whose box 7 code tells the IRS whether the 10 % additional tax applies. The withholding rarely matches the bill: a 44-year-old earning $70,000 who cashes out $30,000 has $6,000 withheld but owes $9,600, while a 52-year-old with no other income owes $4,420 on the same check. Some plans also refuse partial withdrawals, so read the plan rules first. The calculator above shows the gap for your income.
Step one: find out what your plan allows
The law sets the taxes; the plan document sets the menu. Before asking for money, get the summary plan description and look for three answers: whether a former employee can take any amount at any time or only the whole balance, whether installments are offered, and how long processing takes. A plan that only pays lump sums can push a large balance onto one tax return. Active employees face tighter limits still, often loans and hardship withdrawals only.
Step two: choose who receives the money
Publication 575 describes two routes for an eligible rollover distribution (Publication 575). The direct rollover sends the money straight to an IRA or to another plan that accepts it: no tax is withheld and nothing is taxed. The payment-to-you option sends a check or a transfer to your bank, and "the payer must withhold 20 % of it", even if you intend to put the money into an IRA within the 60 days the law allows.
That last case catches people. The full amount counts as distributed although you received only 80 % of it. To roll over the whole $30,000 within 60 days, you must find the $6,000 withheld from other savings; whatever you do not put back is taxed, and if you are under 59½ the 10 % applies to it too, withheld part included. Withholding is not required on payments under $200 in the year from the same plan, and a direct rollover avoids it entirely.
One more route exists without your asking. A small balance paid out without your consent before age 62 or normal retirement age is a mandatory distribution; above $1,000, the plan must roll it automatically into an IRA unless you choose otherwise.
Step three: the check, and what really comes due
The 20 % is a flat deposit toward your tax. It ignores your bracket, your other income and the 10 %. Three people asking for $30,000 in 2026 show how far it can miss.
Still working at 44 with $70,000 of salary, the withdrawal lands in the 22 % bracket: $6,600 of income tax and $3,000 of additional tax against $6,000 withheld. Still to pay at tax time: $3,600. Retired at 52 with nothing else coming in, the standard deduction of $16,100 shelters part of it: $1,420 of tax plus $3,000 for the early payment, so $1,580 comes back as a refund. A married couple using the rule of 55 at 56 owes $0 in federal tax on it, yet the plan still keeps $6,000 until they file.
| Paid to you at 50 | Withheld (20 %) | Income tax | 10 % additional tax | At filing |
|---|---|---|---|---|
| $10,000 | $2,000 | $0 | $1,000 | $1,000 back |
| $25,000 | $5,000 | $890 | $2,500 | $1,610 back |
| $50,000 | $10,000 | $3,820 | $5,000 | $1,180 back |
| $100,000 | $20,000 | $13,170 | $10,000 | $3,170 due |
Your check against your real bill
Refund at tax time
$1,610
| Check you receive | $14,400 |
| Federal income tax | $190 |
| 10 % additional tax | $1,800 |
| Marginal rate reached | 10 % |
When the withholding falls short, Topic 558 warns that you may have to make estimated tax payments, since a penalized payment often needs more than 20 % (Topic 558).
Asking for the right gross amount
If the goal is a fixed sum in hand after every tax, ask for more. Someone of 47 with $60,000 of other income who needs $20,000 net has to take about $28,456: $5,610 of federal tax and $2,846 of additional tax come out of it. The early withdrawal calculator works that figure for any state.
Step four: Form 1099-R and Form 5329
In January the plan mails Form 1099-R. Box 7 carries the distribution code, and the IRS reads it to decide whether the 10 % is owed. Code 1 means an early payment with no known exception. If the tax is owed and code 1 is printed, you report the 10 % directly on Schedule 2 of Form 1040, line 8, without Form 5329. If an exception does apply, such as the rule of 55, a 72(t) series or medical expenses above 7.5 % of adjusted gross income, and the code does not show it, you file Form 5329 and enter the exception number yourself (IRS exceptions table). A rule of 55 payment printed with code 1 is the usual case for that correction.
What a withdrawal does to the rest of your year
Every pre-tax dollar taken adds to adjusted gross income. For someone buying health coverage on the Marketplace, that income also sets the premium credit, and a large cash-out can cross the line where the credit stops; the subsidy cliff page shows where it sits. Before 59½, the draw-age page tells you which accounts would avoid the 10 % altogether.