At what age is 401K withdrawal tax free? (2024)

At what age is 401K withdrawal tax free?

This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty.

Key Takeaways

In general, Roth 401(k) withdrawals are not taxable, provided the account was opened at least five years ago and the account owner is age 59½ or older. Employer matching contributions to a Roth 401(k) are subject to the account owner's income tax rate.

The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.

Withdrawing money from your 401(k) before age 59 ½ usually results in taxes and costly penalties, but there are several ways to withdraw money penalty-free. Still, it may be best to not touch your retirement savings until you're retired.

If you withdraw money from your 401(k) before you're 59½, the IRS usually assesses a 10% tax as an early distribution penalty. That could mean giving the government $1,000, or 10% of a $10,000 withdrawal, in addition to paying ordinary income tax on that money.

Convert the account into an individual retirement account. Start cashing out via a lump-sum distribution, installment payments, or purchasing an annuity through a recommended insurer.

The age at which 401(k) withdrawals become tax-free is generally 59 ½. Once you reach this age, you can withdraw funds from their 401(k) without incurring the 10% early withdrawal penalty. However, all withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.

Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.

Do you pay taxes twice on 401(k) withdrawals? We see this question on occasion and understand why it may seem this way. But, no, you don't pay income tax twice on 401(k) withdrawals. With the 20% withholding on your distribution, you're essentially paying part of your taxes upfront.

At what age do you stop paying IRS taxes?

Taxes aren't determined by age, so you will never age out of paying taxes. Basically, if you're 65 or older, you have to file a tax return in 2022 if your gross income is $14,700 or higher.

The IRS rule of 55 recognizes you might leave or lose your job before you reach age 59½. If that happens, you might need to begin taking distributions from your 401(k). Unfortunately, there's usually a 10% penalty—on top of the taxes you owe—when you withdraw money early. This is where the rule of 55 comes in.

(updated March 14, 2023) Required Minimum Distributions (RMDs) are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (73 if you reach age 72 after Dec. 31, 2022).

The Bottom Line. Withdrawals from 401(k)s are considered income and are generally subject to income tax because contributions and growth were tax-deferred, rather than tax-free.

401(k) Income Doesn't Change Benefits

You'll owe income tax on your 401(k) distributions when you take them, but not Social Security tax. The amount of your Social Security benefit won't be affected by your 401(k) taxable income.

You can begin withdrawing money from your 401(k) without facing the penalty once you reach age 59½. But the IRS makes a special allowance to help workers who, whether by necessity or choice, retire a few years earlier.

Series of Substantially Equal Payments (SEPP)

Account holders can avoid the early withdrawal penalty by opting for SEPP based on their life expectancy or the joint life expectancy of themselves and their beneficiary.

The IRS allows individuals to cash out their 401k and roll it over to an IRA without penalty and without the cashed-out amount being subject to taxation. You can also close out a 401k without penalty when you leave your job if you are at least 55 years old, but taxes will apply to the amount you withdraw.

By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary. So, for example, if you're earning $75,000 per year, you should have $750,000 saved.

Do You Have to Pay Taxes After Age 65 (or 59 ½)? Your age can affect how much you pay in taxes. Again, the early withdrawal penalty usually applies to those under the age of 59 ½. After that age, you still have to pay federal income tax on withdrawals in most cases, but the penalty goes away.

How to reduce taxes on 401k withdrawals?

As you pull money out, you'll owe income taxes on the funds. Some 401(k) plans will automatically withhold 20% or so of your account to pay for taxes. You'll want to check with your plan provider to see how your particular 401(k) works.

One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed.

No, you aren't paying taxes twice. Tax withheld is just an estimated advance payment of your taxes. The final tax amount can only be determined when you fill out your tax return. If too much tax was withheld, you'll receive a refund; otherwise, there'll be a tax due.