In general, if you cash out your 401(k) in one lump sum, 20% will be withheld for tax purposes, regardless of when you do so. It’s important to note that this is not an extra tax, but a mandatory withholding to cover the tax you owe. You’ll have to pay federal and state income tax on a distribution from a traditional 401(k), as well as a 10% penalty if you make the withdrawal before you’re at least 59 ½.

To avoid the mandatory 20% federal withholding, you could choose to roll over the funds into another qualifying account, take regular distributions from your 401(k) when you’re of age or take out a loan from your 401(k) if your plan allows it. You can avoid the 10% early withdrawal penalty by waiting until you’re 59 ½ to start taking distributions.

The tax implications of cashing out a 401(k) can be complicated and depend on many factors, including the type of account you have and your age. Have questions or concerns? Book your appointment to talk taxes with the pros today.

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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.