The way the IRS taxes a 401(k) depends on whether it’s a Roth 401(k) or a traditional 401(k).

Traditional 401(k)s

  • Contributions are made with pre-tax dollars, which means you have not paid taxes on the funds yet.
  • Withdrawals from a traditional 401(k) are taxed as regular income.

Roth 401(k)s

  • Contributions to Roth 401(k)s are made with post-tax dollars, which means you’ve already paid taxes on the funds.
  • Withdrawals from Roth 401(k)s are not subject to tax, as long as you are at least 59 ½ and your first contribution was at least 5 years ago.

For both traditional 401(k)s and Roth 401(k)s, there is a 10% penalty if you make a withdrawal before you reach the age of 59 ½. There is also a 20% withholding if you take a lump sum withdrawal to help cover the tax. You’ll get a tax refund of withholding if you owe less than 20%.

There are many nuances when it comes to the way retirement accounts are taxed. The good news? You don’t have to tax alone. Work with the professionals who can help you maximize your tax benefits this year. Book your appointment today.

Sharon Brucker, CPA Senior Tax Research Analyst Published on: August 28, 2025
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*This content is for general informational purposes only. It is not intended to be comprehensive and should not be construed as professional tax or financial advice for any specific individual tax situation. Taxpayers should always consult a qualified professional for individual guidance. This information constitutes a solicitation under the Treasury Department's Circular 230. Most offices are independently owned and operated.