How Much Tax Is Paid on a $100k 401(k) Withdrawal?

Withdrawing $100,000 from a 401(k) before retirement has several tax implications. The total tax you will owe depends on a combination of federal and state laws, your age, and your total income for the year. These factors determine the actual amount of money you will receive after taxes and penalties.

The Core Tax Components of a Withdrawal

A distribution from a traditional 401(k) is subject to several layers of taxes and potential penalties. The entire withdrawal is treated as ordinary income by the federal government, not as capital gains, and is taxed at your regular marginal tax rate. This can push you into a higher tax bracket for the year.

Most states also tax 401(k) withdrawals as income, which is a separate liability based on your state’s tax code. If you are under the age of 59½, you will also face an additional 10% early withdrawal penalty on the entire distribution. For a $100,000 withdrawal, this penalty alone is $10,000, and it is applied on top of any federal and state income taxes you owe unless you qualify for a specific exception.

Calculating Your Federal Tax Liability

The $100,000 withdrawal is added directly to your Adjusted Gross Income (AGI). The increase in AGI not only exposes the withdrawn funds to taxation but can also phase you out of certain deductions and credits, further increasing your liability. For example, consider a single individual earning an annual salary of $60,000. When the $100,000 is added, their total income for the year becomes $160,000, and a large portion of that withdrawal will be taxed at higher marginal rates than their regular salary.

Your 401(k) plan administrator is required to withhold a mandatory 20% for federal taxes. On a $100,000 withdrawal, you would receive a check for $80,000, with $20,000 sent directly to the IRS. This 20% withholding is a prepayment toward your tax bill. Because your actual tax liability will likely be more than the $20,000 withheld, you could have a large tax bill when you file your annual return.

Exceptions to the Early Withdrawal Penalty

The IRS allows for several exceptions that waive the 10% early withdrawal penalty, although regular income tax still applies. Common exceptions include:

• Total and permanent disability. To qualify, you must provide proof from a physician that you are unable to engage in any substantial gainful activity due to a long-term physical or mental impairment.
• Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). The penalty is only waived for the amount of the expenses that surpasses this AGI threshold, not the entire withdrawal.
• Distributions made to a beneficiary after the death of the 401(k) account holder.
• Transfers to a former spouse as part of a divorce settlement. This must be done through a Qualified Domestic Relations Order (QDRO) to be penalty-free.
• Withdrawals from the 401(k) of your most recent employer if you leave the job during or after the year you turn 55.

State Tax Considerations

The tax impact of a withdrawal extends beyond federal obligations and is heavily influenced by state-specific tax laws. Most states treat retirement distributions as taxable income, mirroring the federal approach by adding the withdrawn amount to your state taxable income.

A handful of states do not levy a state income tax at all. If you are a resident of one of these states, your withdrawal would only be subject to federal income tax and the potential 10% early withdrawal penalty.

Some states that tax income have specific provisions for retirement distributions. These can include partial exemptions for taxpayers over a certain age or a complete exemption for retirement income up to a certain limit. You must research your state’s tax code to accurately project the total cost of the withdrawal.

Reporting the Withdrawal on Your Tax Return

When you take a distribution from your 401(k), your plan administrator is required to send you Form 1099-R. This form provides all the necessary information for reporting the withdrawal on your tax return. Box 1 shows the gross distribution amount, Box 2a shows the taxable portion, and Box 4 details the amount of federal income tax that was withheld.

A field on Form 1099-R is Box 7, which contains a distribution code. This code tells the IRS the reason for the withdrawal and whether it is subject to the 10% early withdrawal penalty. For example, a code ‘1’ indicates an early distribution with no known exception, while a code ‘2’ signifies an early distribution for which an exception may apply.

You will report the information from Form 1099-R on your Form 1040. The gross distribution is reported on line 5a, and the taxable amount on line 5b. If you qualify for an exception to the 10% penalty, you must file Form 5329 to specify the exception you are claiming to waive the additional tax.