{"id":111,"date":"2023-03-13T14:19:39","date_gmt":"2023-03-13T14:19:39","guid":{"rendered":"http:\/\/eplapprw11.paychex.com\/blogtest\/?post_type=article&p=111"},"modified":"2025-10-02T17:23:37","modified_gmt":"2025-10-02T17:23:37","slug":"what-to-know-about-401k-taxes","status":"publish","type":"article","link":"https:\/\/secure.eplanservices401k.com\/marketing\/article\/what-to-know-about-401k-taxes\/","title":{"rendered":"What to Know About 401(k) Taxes"},"content":{"rendered":"\n

While investing in a traditional 401(k) plan<\/a> can prove advantageous for your future retirement, it\u2019s also necessary to be aware of the tax obligations that accompany your traditional 401(k) plan. Read on to learn more about 401(k) taxes and potential withdrawal penalties.<\/p>\n\n\n\n

How are 401(k) contributions taxed?<\/h2>\n\n\n\n

When making contributions to your traditional 401(k) plan, the funds are taken from your gross paycheck before the IRS takes its percentage. This is also known as pre-tax income. Due to your contributions coming from your pre-taxed wages, you may take home more money because you\u2019ll be taxed on a smaller amount.<\/p>\n\n\n\n

Individuals under the age of 50 can contribute up to $22,500. Those aged 50 and older may contribute up to $30,000. With a traditional 401(k) plan, FICA tax contributions such as Medicare and Social Security must still be made.<\/p>\n\n\n\n

In January, you\u2019ll receive a W-2 form from your employer detailing your tax withholdings and 401(k) contributions.<\/p>\n\n\n\n

How are 401(k) early withdrawals taxed?<\/h2>\n\n\n\n

Generally, you don\u2019t have to pay taxes on your traditional 401(k) until you withdraw the funds. Though withdrawal taxes are inevitable with a traditional 401(k) plan, you stand to face more financial consequences with early withdrawal.<\/p>\n\n\n\n

When you withdraw your traditional 401(k) funds, the IRS requires 20% tax withholding on those funds, which means though you withdraw a certain amount, you will only receive a fraction of it.<\/p>\n\n\n\n

The IRS will also penalize you for withdrawing your funds before retirement by assessing a 10% penalty when filing your tax return, resulting in paying an additional amount on top of the 20% tax you had withheld.<\/p>\n\n\n\n

Are there exceptions to the early withdrawal tax penalty?<\/h2>\n\n\n\n

Ideally, you want to withdraw your 401(k) funds during retirement. However, in the case of emergencies, you may need to access these funds earlier. If you do need access to your traditional 401(k) funds before age 59 1\/2, there are a few instances in which you would not be required to pay the 10% penalty. Some of these exceptions include but are not limited to<\/a>:<\/p>\n\n\n\n