At 60, He Plans to Withdraw $40,000 From His 401(k) for a Truck. The Plan Will Withhold 20% Up Front, and His Final Tax Bill Could Be Higher

Trying to pull exactly $40,000 from a 401(k) to pay for a truck can leave thousands of dollars at risk before the purchase is even complete, and the IRS may still send a bill later on top of what the plan already withheld.

He’s 60, he has picked out the truck, and the price tag is $40,000, so he logs in to his 401(k) and requests that exact amount. About a week later, only $32,000 shows up. Then, when tax season arrives, the IRS may want more.

That kind of mistake is common. One retired caller to Clark Howard’s show described a similar debate with his wife: whether to withdraw $30,000 from retirement accounts to buy a car outright or to finance it with a loan. The dollar amount is larger here, but the same tax trap applies.

Why the Plan Holds Back 20%

When a 401(k) sends money directly to you, federal rules require the plan to withhold 20% for taxes (26 U.S.C. § 3405(c)(1)(B)). He cannot opt out of that withholding by checking a box. The only way around it is to have the funds sent straight to another retirement account, such as an IRA (§ 3405(c)(2)).

There is one advantage: because he is older than 59½, the 10% early-withdrawal penalty does not apply (§ 72(t)(2)(A)(i)). But the withdrawal is still taxed as ordinary income, the same way wages are (§ 402(a)).

His Tax Rate Determines Whether 20% Is Enough

The withholding is only an advance payment on the tax he really owes. The final amount depends on his tax bracket. For 2026, single taxpayers receive a $16,100 standard deduction. They pay 22% on taxable income above $50,400 and 24% on taxable income above $105,700.

Say he is single and retired, with $90,000 a year coming in from a pension and consulting work. That leaves him with $73,900 of taxable income before the truck withdrawal. To end up with $40,000 after withholding, he would need to request $50,000. The plan would send $10,000 to the IRS.

That $50,000 pushes $18,200 of his income into the 24% bracket. His federal tax on the withdrawal would come to about $11,364, which means he would still owe roughly $1,364 when he files. If he lives in a state with income tax, that state would take its share as well.

A Single Large Withdrawal Can Affect Health Costs and Benefits

• Marketplace coverage: If he retired before Medicare and buys insurance on the exchange, the size of his premium subsidy depends on annual income. A one-time $50,000 increase could reduce that help.
• Medicare premiums: Medicare uses tax returns from two years earlier to set premiums. In 2026, single filers above $109,000 pay more than the standard $202.90 monthly Part B premium, starting at $284.10. At age 60, that is not an immediate issue, but a large withdrawal at 63 or older would affect the Medicare bill.
• Social Security: Once benefits begin, they become taxable when half of the benefit plus other income exceeds $25,000 for a single filer, and even more of the benefit is taxed above $34,000 (§ 86(c)). A large withdrawal can make more of those benefits taxable.

Less Expensive Ways to Get the Truck

1. Split the withdrawal across two tax years. He could take $25,000 in December and $25,000 in January. That keeps taxable income in each year below $98,900, under the 24% threshold. His federal tax would fall to about $11,000, saving $364. The savings are modest, but splitting can matter more when health subsidies or Medicare thresholds are involved.
2. Roll the money into an IRA first. A direct rollover avoids withholding. IRA withdrawals normally default to 10% withholding, and he can choose a different percentage or decline withholding altogether (§ 3405(b)(2)(A)). That gives him more control over matching withholding to his real tax rate.
3. Use cash or a taxable brokerage account. When investments are sold in a regular brokerage account, only the gain is taxed. Cash sitting in an average one-year CD earns just 2%, so using it would sacrifice very little interest.
4. Take a 401(k) loan if he is still employed. A loan within the legal limits is not treated as a taxable withdrawal (§ 72(p)(2)). If he has already left the job, the answer depends on the plan’s rules. Some plans allow former employees to keep repaying old loans, but many will not allow new ones.
5. Finance part of the purchase. A small auto loan lets the 401(k) continue growing and spreads the cost over several years.

The best approach is to move the money into an IRA and then withdraw it over two tax years, with withholding set to fit the bracket. Asking the 401(k) for the full amount all at once is the least favorable choice.

That route means losing 20% immediately, possibly facing another bill later, and gaining nothing except a bigger tax burden. It is one of several IRS rules that can quietly drain retirement savings, and the rest are covered in a free guide to retirement-account traps.

Ask This Before Taking Any Money Out

Before requesting a dollar, call the plan and ask: “If I do a direct rollover to an IRA instead of taking the cash, will anything be withheld, and how long will the transfer take?” If the answer is zero withholding and only a short wait, he can manage the tax bill himself and still be driving the truck before winter arrives.