At 60, He Wants to Use a $40,000 401(k) Withdrawal to Buy a Truck. Mandatory Withholding Could Cut the Check to $32,000, and His Final Tax Bill May Be Even Higher

Quick Read

• Federal rules require 401(k) plans to withhold 20% on direct payouts, so a $40,000 withdrawal would deliver only $32,000 before any tax bill arrives later.

• A retiree with $90,000 in existing income may need to take out $50,000 gross to end up with $40,000 net, which can push income into the 24% bracket and leave about $1,364 still owed at filing.

• Moving the money to an IRA first avoids mandatory withholding, and spreading withdrawals over two tax years can help keep income out of higher brackets.

He is 60, he has found the truck, and the price tag is $40,000. So he logs into his 401(k) and requests that exact amount. About a week later, the money arrives, but it is only $32,000. Then, at tax time, the IRS may still want more.

That kind of surprise is common. One retired caller to Clark Howard's show described a similar debate with his wife: whether to pull $30,000 from retirement savings to pay cash for a car or take out a loan. The dollar figures may be different, but the same trap applies.

Why the Plan Withholds 20% Before He Gets the Money

If a 401(k) sends money directly to the participant, federal law requires the plan to withhold 20% for taxes (26 U.S.C. § 3405(c)(1)(B)). He cannot simply opt out of that withholding. The main way around it is to have the money transferred directly to another retirement account, such as an IRA (§ 3405(c)(2)).

There is one bright spot: because he is older than 59½, the 10% early-withdrawal penalty does not apply (§ 72(t)(2)(A)(i)). Still, every dollar is taxed as ordinary income, just like wages (§ 402(a)).

His Tax Bracket Determines Whether 20% Is Enough

Withholding is only a prepayment on the tax bill. What he actually owes depends on his bracket. For 2026, single taxpayers get a $16,100 standard deduction. Taxable income above $50,400 is taxed at 22%, and taxable income above $105,700 is taxed at 24%.

Suppose he is single and retired, with $90,000 a year already coming in from a pension and consulting work. That puts his taxable income at $73,900 before the truck purchase. To net $40,000 after withholding, he would need to request $50,000. The plan would send $10,000 to the IRS.

That $50,000 would push $18,200 of his income into the 24% bracket. His federal tax on the withdrawal would come to roughly $11,364, which means he would still owe about $1,364 when he files. If his state levies an income tax, that would add another bill.

A Big Income Year Can Spill Into Health Costs and Benefits

• Marketplace coverage: If he retired before Medicare and buys insurance on the exchange, his premium assistance depends on income for that year. A one-time $50,000 increase can reduce that help.

• Medicare premiums: Medicare uses tax returns from two years earlier to set premiums. In 2026, single taxpayers with income above $109,000 pay more than the standard $202.90 monthly Part B premium, starting at $284.10. At age 60, he is not there yet, but a large withdrawal at 63 or later would show up on his Medicare bill.

• Social Security: Once benefits begin, part of them become taxable when half of the benefit plus other income rises above $25,000 for a single filer, and more of the benefit is taxed past $34,000 (§ 86(c)). A large withdrawal can make a bigger share of those benefits taxable.

Lower-Cost 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 would keep taxable income in each year below the 24% threshold. His federal tax would fall to about $11,000, saving $364. The savings are modest, but splitting the withdrawal can matter more when health subsidies or Medicare premiums are involved.

2. Roll the money into an IRA first. A direct rollover avoids mandatory withholding. IRA withdrawals default to 10% withholding, and he can choose a different amount or opt out entirely (§ 3405(b)(2)(A)). That gives him a chance to match withholding to his real tax bracket.

3. Use cash or a taxable brokerage account. When investments are sold in a regular account, only the gains are taxed. Cash in an average one-year CD earns about 2%, so tapping it would cost him very little in lost 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 sponsors let former workers keep repaying old loans, while many do not allow new ones.

5. Use financing. A modest car loan lets the 401(k) keep compounding and spreads the cost over several years.

The smartest move is usually to roll the money into an IRA and then withdraw it over two tax years, with withholding set to fit his bracket. Asking the 401(k) for the entire amount at once is the worst choice.

He would lose 20% immediately, may face another bill in April, and would have nothing to show for the extra taxable income except higher costs. This is one of several IRS rules that quietly take money from retirees, and a free guide maps out more of the traps that can drain retirement accounts.

What to Ask the Plan Before Requesting the Money

Call the plan administrator and ask: "If I do a direct rollover to an IRA instead of taking cash, will anything be withheld, and how long will the transfer take?" If the answer is no withholding and a transfer time of a couple of weeks, he can manage his tax bill and still be driving the truck before winter.

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