How Can I Avoid Paying Taxes on My 401(k) Withdrawal?

Stacie Dobbe is a senior advanced planning attorney with Northwestern Mutual.

A traditional 401(k) is a great way to save for retirement. That’s because you don’t pay taxes when you make or your employer makes contributions. You also won’t be taxed on earnings as your money grows, which allows your contributions to compound more quickly. It all adds up to a lower taxable income during your working years—hopefully allowing you to save more money.

Now for the catch: Traditional 401(k) withdrawals (technically referred to as “distributions”) are taxed as ordinary income in retirement. As a result, you will be taxed when it comes time to withdraw your savings.

How much tax will I pay on a 401(k) withdrawal?

Many people think the money in their account is all theirs. That’s not true, due to the way 401(k) taxes work. Since you fund these accounts with pretax contributions, your withdrawals will be taxed at your ordinary income tax rate in retirement. You’ll also have to pay taxes on any funds you receive through an employer match. Withdrawals from a 401(k) are never tax-free at any age. So even if you have $1 million saved, the amount you’ll receive after taxes will likely be much less.

401(k) early withdrawal penalties

If you withdraw money from your 401(k) prior to age 59½, you’ll likely be hit with a 10 percent early withdrawal penalty on top of taxes unless an exception applies. However, if you have a Roth 401(k), the rules are different. If you are contributing to a Roth 401(k), you won’t pay taxes on your withdrawals in retirement because the money you contributed was already taxed. (This is the same way a Roth IRA works.) However, you might still incur taxes and penalties for withdrawing investment earnings before age 59½.

How to calculate 401(k) withdrawal taxes

Any withdrawals you take from your 401(k) in retirement will be taxed at your ordinary income tax rate. To calculate your taxable income rate, you’ll use your gross income, including any 401(k) distributions, minus any deductions. (Most people just take the standard deduction.) That number will determine which tax bracket you’re in. Your tax bracket then determines your effective tax rate—and how much tax you’ll pay on your income.

How the rule of 55 works with 401(k) taxes and penalties

The rule of 55 is an IRS provision that allows you to withdraw 401(k) funds without incurring a 10 percent early withdrawal penalty, but there are stipulations:

• The account must be through your most recent employer. However, employers are not required to follow the rule of 55.
  • You must stop working for that employer during or after the calendar year that you turn 55.

Just be aware that you’ll still owe taxes on these 401(k) withdrawals.

Can you minimize taxes on your 401(k)?

Your 401(k) withdrawals are never tax-free, and there’s no way to avoid paying these taxes. But it may be possible to access your 401(k) money with minimal tax implications. (FYI, a Roth IRA has a bit more flexibility when it comes to penalty-free early withdrawals.)

• Option 1: Take out a 401(k) loan. If your company allows it, you may be able to borrow against your 401(k), and you won’t be taxed on the amount you borrow. But if you don’t pay the loan back on time, you’ll owe taxes—and a possible early withdrawal penalty. In general, it usually isn’t a good idea to cash out your 401(k) to pay off debt. Pulling money out of the market can deplete your nest egg and cause you to miss out on investment returns.
• Option 2: Take a distribution during a year when your retirement income (including the distribution) falls below your standard deduction.

If you’re planning to make regular 401(k) withdrawals in retirement, you’ll have to pay taxes. But there are strategies to help you manage your tax liability and possibly get a bigger tax refund as a retiree.

How to make tax-efficient 401(k) withdrawals

Here are a few ways to protect more of what you’ve earned. (After all, you worked hard for it!)

Be strategic about how much you withdraw

Let’s say you’re retired and are older than 59½. Your tax status in 2025 is married filing jointly. According to 2025 tax brackets, as long as your taxable income stays below $96,950, you’ll remain in the 12 percent tax bracket—but even a dollar above that amount will be taxed at 22 percent. That’s a big jump, and the rate gets progressively higher as your taxable income increases. For the 2026 tax year, your taxable income needs to stay below $100,800.

Planning your 401(k) withdrawals strategically could mean that you withdraw just enough to get you to $96,949 in taxable income for 2025 or $100,799 for 2026, so you stay below the 22 percent tax bracket. If you need more than that in retirement, you could switch to taking money from non-taxable accounts, like a Roth account or the basis you paid into whole life insurance (which you can typically withdraw tax-free). With this strategy, you’re minimizing your tax liability as you draw down your retirement portfolio.

Have diverse retirement income sources

To be truly tax-efficient in retirement, it’s best to have a diverse mix of assets to work with—which means saving for retirement using more than just a traditional 401(k). This allows you to make strategic withdrawals in retirement that can help you lower your tax burden overall. This is because different assets, like Roth accounts and whole life insurance, receive different tax treatment.

Other ways to stay in a lower tax bracket

Creative strategies to stay in a lower tax bracket during retirement can include:

• Using tax-advantaged accounts like a health savings account (HSA) or flexible spending account (FSA). An HSA or FSA allows you to put pretax dollars toward qualified medical expenses.
• Carefully balancing Roth distributions with traditional distributions.
• Delaying retirement and taking a lower-paying job to reduce your taxable income and give your 401(k) even more time to grow. (If you’re old enough, you can still work and collect Social Security at the same time. That can allow you to stack up even more money for your nest egg.)

Consider a Roth IRA conversion or IRA rollover

If you’re still saving for retirement, you could also convert a portion of your 401(k) to a Roth account. You’ll owe taxes that year on the amount of your Roth conversion, but you probably won’t owe any additional taxes during your lifetime. That can set you up to be more taxefficient in retirement.

You can also consider transferring funds from one IRA to another, which is called an IRA rollover. There are two different ways to do this:

• A direct rollover. You can contact your plan administrator and have them move funds from one retirement account to another. (You might have done this when you switched jobs and rolled over your old 401(k) to your new employer).
• A 60-day rollover. Another option is to have the funds sent directly to you, then you deposit those funds into a new retirement account within 60 days of the withdrawal.

Keep required minimum distributions in mind

It’s important to remember that required minimum distributions (RMDs) begin at age 73. (On January 1, 2033, this age will rise to 75.) Your RMD is the minimum amount of money that you’re legally mandated to withdraw each year from a retirement account. This amount is determined by dividing your previous end-of-year account balance by a life expectancy factor that’s based on your age. The IRS provides these resources to help you calculate your RMD.

Once you’re required to start taking RMDs, you must withdraw a certain amount and pay taxes on it each year. Taking lower withdrawals in your early years could leave you with higher RMDs later on. That’s why it’s a good idea to have a well-thought-out plan to generate income in retirement.

Consider charitable giving strategies

With a qualified charitable distribution (QCD), you can give up to $108,000 in 2025 and $111,000 for the 2026 tax year directly from an IRA to qualified charities. These funds satisfy RMDs without counting toward your taxable income. If your money is in a 401(k), you could roll it over to an IRA to take advantage of this strategy.

How to control what you’ll pay in taxes

While you can’t avoid paying taxes on 401(k) withdrawals, your Northwestern Mutual financial advisor can help ensure that you’re being as tax efficient as possible. During your working years, they can help you uncover opportunities and blind spots that might otherwise go overlooked—while looking ahead to your retirement.

If you’re about to retire, they can build an income plan that also protects your portfolio against other risks to your retirement. That includes everything from market downturns to a longer lifespan. Consider them your co-pilot who leaves you with more time to enjoy life.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.