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.
Traditional IRAs: When you pay taxes on withdrawals
To understand how withdrawals from a traditional IRA will be taxed, you first need to consider your age when you tap this account. Withdrawals from a traditional IRA will be taxed differently if they’re made before you reach the age of 59 ½ vs. after.
Early withdrawals from a traditional IRA
If you’re considering taking money out of your IRA before age 59 ½, then beware: You will likely pay taxes on the amount of money you withdraw and you may owe a penalty as well. This will leave you with just a fraction of the money you withdrew.
What’s left after taxes and penalties
Suppose you make an early withdrawal of $10,000 from your traditional IRA account:
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- Your federal income tax bill will likely range from $1,000 to $3,700, depending on your federal income tax bracket. You may also have to pay an early withdrawal penalty of 10 percent, or $1,000, on this withdrawal.
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.
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 withdrawals from a traditional IRA
The good news for retirement savers is that when it comes to withdrawing money from a traditional IRA, the IRS pretty much only cares about your age. So long as you’re older than 59 ½, you can withdraw from your IRA for any reason and you won’t be penalized. That means you can start tapping into this account even if you’re still working and plan to continue making contributions to this account.
Withdrawals from a traditional IRA after the age of 59 ½ are treated as ordinary income, meaning that your withdrawals could potentially bump you into a higher tax bracket. At current tax rates for 2025, your withdrawals could be taxed at a rate ranging from 10 percent to 37 percent. You may also be required to pay state income tax on your IRA withdrawals. (Learn more about your 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 exact age you must start RMDs depends on when you were born, but it’s currently 73 and rises to 75 for those born in 1960 or later. If you miss an RMD, you might have to pay a whopping 25 percent penalty of the amount that should’ve been distributed. That said, if you correct your error within two years, the penalty drops to 10 percent.
If the thought of paying taxes on the money you’ve saved up for decades seems unfair, don’t forget: You didn’t pay taxes on your contributions, and the money has been growing tax-free.
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Roth IRAs: When you pay taxes on withdrawals
The reason why many savers opt for a Roth IRA vs. 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).
In addition to tax-free withdrawals, another perk of the Roth IRA is that, unlike a traditional IRA, you don’t have to start making minimum withdrawals at any specific age. And if there’s money in this account after you die, it generally passes to your heirs free of income taxes, as well.
Early withdrawals 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.
Earnings, however, are taxed if you make early withdrawals from a Roth IRA. Any earnings you withdraw from a Roth IRA before the age of 59 ½ may be taxed like ordinary income and may trigger the 10 percent early withdrawal penalty — unless you meet one of the aforementioned exemptions.
There’s a final stipulation to be aware of with Roth IRA withdrawals: If you withdraw your earnings within five years of opening the account, then you may owe a 10 percent penalty in addition to income tax on the earnings.
A separate five-year rule also applies to Roth IRA conversions. Instead of being tied to when you open the account, the five-year holding period starts the year you make the conversion. If you make multiple conversions, each will have its own five-year waiting period.
Retirement withdrawals from a Roth IRA
The five-year holding periods for Roth IRAs apply even if you’re older than 59 ½, though the difference is that earnings will be subject to federal income taxes — the 10 percent penalty no longer applies after this age.
Otherwise, if you’ve satisfied the five-year holding period and you’re older than 59 ½, any distributions from a Roth IRA aren’t subject to federal or state income tax.
Traditional 401(k)s: When you pay taxes on withdrawals
Similar rules apply to withdrawals from 401(k) accounts and IRA accounts, with different tax treatments once again depending on your age at the time of withdrawal and whether you have a traditional 401(k) or a Roth 401(k).
As with IRAs, traditional 401(k) accounts offer a tax benefit at the time of contribution; that is, your contributions to a traditional 401(k) reduce your taxable income, which in turn reduces your tax bill.
Early withdrawals from a traditional 401(k)
The same rules apply to withdrawals from a traditional 401(k) and a traditional IRA before the age of 59 ½. You must pay taxes on the amount of money you withdraw, in addition to the 10 percent penalty tax unless you qualify for one of the IRS exemptions.
While you should consider other sources of money before tapping money in retirement accounts early, there is an alternative built into 401(k) accounts: You can take out a 401(k) loan.
There are plenty of IRS rules that you’ll need to be mindful of if you take out a 401(k) loan, including a five-year repayment requirement, unless you’re using the funds to buy your primary home, in which case you have more time to repay. What’s more, you can only take a loan from a current 401(k) if it’s an option offered by your employer. Also, the maximum loan amount is $50,000 or 50 percent of your vested account balance, whichever is less.
The advantage of a 401(k) loan vs. an early withdrawal is that you won’t have to pay tax or penalties as long as the terms of the loan are satisfied. And a 401(k) loan doesn’t require a credit check and won’t be listed as debt on your credit report.
Retirement withdrawals from a traditional 401(k)
Once you’ve passed the age of 59 ½, you can begin taking withdrawals from your traditional 401(k) penalty-free, though distributions are subject to ordinary income tax rates that in 2025 range from 10 percent to 37 percent.
As is true with traditional IRAs, money in a traditional 401(k) is also subject to required minimum distributions. Failure to take RMDs from a traditional 401(k) can trigger that hefty penalty of 25 percent on the amount that should’ve been distributed. You can delay RMDs if you’re still working for the employer that provides the plan and you don’t own 5 percent or more of the company.
Roth 401(k)s: When you pay taxes on withdrawals
More employers are now offering a Roth 401(k) in addition to a traditional 401(k) and thanks to changes made as part of the Secure Act 2.0, matching contributions from your employer can now be made in the Roth account, though these contributions are taxed upfront.
As with Roth IRAs, you can withdraw contributions to a Roth 401(k) at any time tax-free, though earnings may be taxed if you take the money out of the account before retirement.
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 making withdrawals from a Roth 401(k) before the age of 59 1/2, the earnings you withdraw will be taxed like ordinary income and you may be required to pay the 10 percent penalty — unless you meet one of the aforementioned exemptions. Likewise, the 10 percent penalty may apply if you make an early withdrawal from a Roth 401(k) that you’ve been funding for less than five years.
Finally, as with a traditional 401(k), you may be able to take a loan from your Roth 401(k) — subject to all of the same rules — if this is an option offered by your employer.
Retirement withdrawals from a Roth 401(k)
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.
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