A 401(k) plan allows you to save for retirement in a tax-advantaged way. This 401(k) tax guide will answer some of the most common questions about how this workplace retirement plan can benefit you—plus common mistakes to be aware of.
Is a 401(k) pre-tax?
401(k) plans allow for different types of contributions, including pre-tax and Roth 401(k) after-tax contributions, depending on the plan type. Traditional 401(k)s are funded with pre-tax dollars. This money is withheld from your paycheck before it's taxed, so every dollar goes into your retirement account. A Roth 401(k), however, is funded with post-tax contributions. Roth 401(k) contributions are different than after-tax contributions, which are a separate contribution source that some 401(k) plans may offer.
In 2026, you can contribute up to $24,500 pre-tax or Roth to your 401(k). Some plans may allow after-tax contributions up to the combined employee and employer limit of $72,000. If you're at least age 50 at the end of the calendar year, you can add a pre-tax or Roth catch-up contribution of $8,000 (or $11,250 if age 60–63).
According to the SECURE 2.0 Act’s higher earner rule, in 2026, catch-up contributions for earners whose FICA wages (typically Box 3 of Form W-2) exceed $150,000 in the previous tax year, must be designated as Roth after-tax contributions.
If your employer's plan does not offer a Roth contribution feature and you fall under the high-earner rule, you won’t be able to make catch-up contributions to that plan.
Are 401(k) contributions tax-deductible?
No, contributions to a traditional 401(k) are not tax-deductible. However, any amount you put in from your paycheck lowers your taxable income for the year. This is because traditional 401(k) contributions are made on a pre-tax basis, meaning that the money is withheld from your paycheck before federal income taxes are calculated. That can indirectly reduce your income tax bill. Because you've already received the tax benefit by reducing your taxable income, you cannot claim your contributions as a tax deduction. Roth 401(k) contributions, however, do not reduce your taxable income.
With traditional 401(k)s, the more you put into your account, up to the 401(k) contribution limit, the more you'll save on taxes. With a Roth account, the tax benefit comes when you make potentially tax-free withdrawals in retirement. Remember that the annual 401(k) contribution limit applies to the total amount contributed across both traditional and Roth 401(k) contributions combined.
Do you pay taxes on your 401(k)?
You don't pay taxes on investment income in your traditional 401(k) while the money is in your account. One of the main benefits of a traditional 401(k) is the potential for tax-deferred growth, which means you don't owe taxes on any earnings until you take money out. Roth 401(k)s work similarly in that your investments can potentially grow without taxes while they remain in the account, but any earnings are federally tax-free rather than tax-deferred.1 Earnings and dividends continue to be reinvested, while taxes on your traditional 401(k) are deferred until required minimum distributions (RMDs) kick in, which is typically at age 73. Note that Roth 401(k) balances are not subject to RMDs during the lifetime of the original account owner.
How are 401(k)s and Roth 401(k)s taxed differently?
Traditional 401(k)s have contributions made before tax, with taxes being paid at the time of withdrawal. Roth 401(k)s contributions are made after-tax, meaning you have paid taxes at your current tax rate, and qualified withdrawals are made federally tax-free.1
A traditional 401(k) reduces your current taxable income when you make contributions, but you'll owe income tax on your withdrawals. That could reduce your taxable income during your working years but increase your tax burden in retirement, particularly when RMDs kick in for traditional 401(k)s. Once RMDs begin, you are required to take withdrawals from your traditional 401(k). Remember, however, that Roth 401(k) balances are not subject to RMDs during the lifetime of the original account owner.
Roth 401(k) contributions don't reduce your taxable income, but these accounts do offer tax-free potential growth. You may also benefit from federally tax-free withdrawals in retirement if you wait until age 59½ to take withdrawals and your account meets the 5-year aging rule, unless you qualify for an exception, such as disability or death.1 If these requirements are not met and you do not qualify for an exception to the tax on early distributions, the distribution would be considered non-qualified. Non-qualified withdrawals are taken from your contributions and earnings in proportion. The portion that comes from your contributions would be considered federally tax-free, but the earnings portion would be subject to income tax and potentially penalties, unless an exception applies.
What is an after-tax 401(k)?
An after-tax 401(k) allows you to make after-tax contributions within a workplace retirement plan, but those contributions are still subject to the limits set by the IRS.
After-tax contributions don't reduce your taxable income because they aren't tax-deductible. However, your gains could potentially grow tax-deferred. When you withdraw from an after-tax 401(k) after age 59½, you'll owe income tax on your earnings but not your contributions.
Do you pay taxes on 401(k) withdrawals?
Yes, you generally pay taxes on traditional 401(k) withdrawals. You can start making penalty-free retirement withdrawals when you reach age 59½, but you would still owe income tax. Taking money out before age 59½ typically results in a 10% early withdrawal penalty tax, on top of income tax.
There are some exceptions to paying the 10% early distribution tax, like withdrawing because of a total and permanent disability or withdrawing up to $5,000 per child for qualified birth or adoption expenses.
The rule of 55 might be another option. This IRS provision allows you to make penalty-free withdrawals from a 401(k) if you separate from the employer during the year you turn 55 or later.
Depending on if your plan allows it, one other potential way to access your 401(k) money early without penalties is through a series of substantially equal periodic payments or SoSEPP, also referred to as a SEPP plan. Distributions must begin after you separate from service and be taken as part of a series of substantially equal payments made over your life expectancy, or the joint life expectancy of you and a beneficiary. Withdrawals can be done annually, monthly, or quarterly, as long as they are consistent and continue for a period of at least 5 years, or until the account owner reaches age 59½, whichever occurs later. Withdrawals must remain consistent and generally cannot be stopped or modified once they begin, except in limited circumstances such as disability or death. While you avoid the 10% early withdrawal penalty, you still owe income tax.
At what age are 401(k) withdrawals tax-free?
Withdrawals from a traditional 401(k) are never tax-free just because you've reached a certain age. However, qualified distributions from Roth accounts, like a Roth 401(k), are tax- and penalty-free.1 For non-qualified distributions, part of what you withdraw comes from your contributions, which have already been taxed, and part comes from earnings, which are subject to income tax and potential penalties unless an exception applies.
What is the tax rate on 401(k) withdrawals?
Your traditional 401(k) tax rate on withdrawals is the same as your federal marginal ordinary income tax rate for the year, which is determined by your total taxable income and corresponding tax bracket. This typically ranges from 10% to 37%. Even if you're withdrawing earnings, they're taxed as ordinary income. In comparison, if a Roth 401(k) distribution is considered qualified,1 it is not subject to income tax. If you are making a non-qualified distribution from your Roth 401(k), the earnings portion that is subject to tax would be taxed at your federal income tax rate.
What are some ways to manage taxes on 401(k) withdrawals?
There are a few different strategies that could help you reduce taxes in years you withdraw from your traditional 401(k), though it may vary based on individual circumstances and tax considerations. State tax treatment can also vary, so withdrawals may be taxed differently depending on where you live. Make sure to consult a tax professional for your specific situation.
Withdraw from a combination of accounts
This involves contributing to a mix of retirement accounts offering different tax benefits. For example, you might balance taxable withdrawals from a traditional 401(k) with federally tax-free withdrawals from a Roth IRA. This could prevent you from being pushed into a higher tax bracket during retirement the way withdrawing exclusively from a traditional 401(k) might.
Consider a Roth conversion
For future tax flexibility, you could do a Roth IRA conversion, converting part of your 401(k) balance to a Roth. You'll pay taxes on the converted amount, but your future Roth withdrawals could be federally tax-free.
Think of your heirs
Your heirs could inherit a Roth balance federally tax-free, rather than potentially owing taxes on withdrawals from an inherited traditional 401(k) account as long as the 5-year rule has been met at the time of your passing.
Delay withdrawals through a QLAC
You can use 401(k) funds to buy a special kind of deferred income annuity called a Qualified Longevity Annuity Contract (QLAC). This can provide an income stream down the road—and the amount you invest won't be factored into future required minimum distributions (RMDs). A QLAC could reduce how much you need to take out of a 401(k) for RMDs, which could indirectly reduce your future tax liability. Remember to speak to a tax professional regarding your specific situation.
Are 401(k) rollovers taxed?
A rollover moves your 401(k) balance from one retirement account to another. That may be a new 401(k) with a different employer or a traditional IRA. In either case, the amount you move over will not be taxed as long as it's sent directly to the new account. If it's sent as a disbursement to you, 20% for federal taxes and possibly state taxes will be withheld. To keep those dollars tax-deferred, you would need to take action by depositing the remainder plus the amount that was withheld in a new employer plan (if eligible) or a Rollover IRA within 60 days, to avoid taxes and penalties. There's one more instance you'd be taxed on a rollover: if you move traditional 401(k) funds into a Roth account. This is considered a Roth conversion, and it's generally a taxable event. After that, your balance could potentially grow federally tax-free.
Do you have to report your 401(k) on your taxes?
You don't have to report to the IRS your 401(k) contributions or investment earnings that remain in the account. Your pre-tax contributions and reduced taxable income will be reflected on the W-2 your employer issues you before tax season. That said, you must report 401(k) withdrawals. Your 401(k) provider should send you the necessary tax forms for reporting the income on your tax return.
What tax forms are associated with 401(k)s?
Here are some 401(k) tax forms you may receive:
- Form 1099-R: If you took a 401(k) withdrawal, Form 1099-R will show the total amount taken, the taxable amount, and any taxes withheld on your behalf so you can report the results to the IRS.
- Form 5329: If you make an early withdrawal from your 401(k), you'll need to complete Form 5329 to determine potential tax penalties or ask for a penalty waiver. Then you'll need to file it with your tax return.
- Form 5498: Form 5498 applies to 401(k) rollovers into an IRA because it tracks your IRA contributions. No need to file it with your tax return, but hold onto it for your records.
For further 401(k) tax help, consider reaching out to a tax professional.