How much more tax do I pay if I cash out my old 401(k) instead of rolling it over?

By Kaz · Published 28 September 2026 · How this site checks figures

Summary

With pretax money, a cash-out costs federal income tax on the whole balance for that tax year, plus a 10% additional tax if you're under 59½ and no exception applies; a direct rollover to an IRA or another plan costs nothing that year and has nothing withheld. At age 40, with all of a $50,000 cash-out taxed in the 22% federal bracket, that is $11,000 of income tax and $5,000 of additional tax, $16,000 in all, before any state tax. The 20% a plan holds back from a cash-out is a down payment on that bill, not the final figure.

One $50,000 balance, two outcomes

Say you're 40 and leaving a job with $50,000 of pretax money in the 401(k).

If you take the cash, the plan withholds 20%, so $10,000 goes to the IRS and $40,000 reaches your bank account. On your return, though, the full $50,000 counts as income, because the withheld $10,000 was still your money. Unless an exception applies, the 10% additional tax adds $5,000. At the 22% rate used in the summary, the $10,000 withheld covers less than two-thirds of the $16,000, leaving $6,000 to pay when you file. Stacked on a year's wages, part of the $50,000 can reach a higher bracket, so the real balance due depends on everything else you earned that tax year. The IRS notes that "the default rate of withholding may be too low for your tax situation" and lets you ask for a higher rate on Form W-4R.

If the plan sends the $50,000 directly to an IRA or your new employer's plan, nothing is withheld, nothing is added to your income, and there's no 10% tax. The money is taxed later, when it comes out of the new account.

The age-55 detail

The 10% tax has an exception for someone who leaves a job during or after the year they turn 55. The IRS's page on leaving a job puts it the other way around: a cash-out may carry the extra 10% "if you aren't at least age 55."

That exception belongs to workplace plans. In the IRS's table of exceptions, the separation-from-service row says "yes" for qualified plans such as 401(k)s and "no" for IRAs. So someone who is 57 and expects to need part of the money before 59½ can take that part from the 401(k) without the 10% tax, but would owe it on the same withdrawal made after rolling everything to an IRA, unless another exception fits. The guide to the Rule of 55 covers who qualifies.

Changing your mind after the check arrives

A cash-out can still become a rollover if you deposit it into an IRA or plan within 60 days. The catch is the withholding. In the example, rolling over the full $50,000 means adding $10,000 of your own to the $40,000 you received; whatever you don't replace is taxed as income and can draw the 10% tax. The page on the 60-day rule and 20% withholding does the arithmetic for any amount.

Sources

Written by Kaz, an independent publisher.
Corrections: the contact form.