Does Texas Tax 401k Withdrawals? IRS Withholding and Penalties

Texas does not tax 401k withdrawals. The state constitution bans personal income taxes outright, so neither the state nor any Texas city or county collects anything when you pull money from a retirement account. The only tax you owe is federal, and for a traditional 401k that means ordinary income tax at rates between 10% and 37% for tax year 2026, plus a 10% penalty if you take the money before age 59½.

Why Texas Takes Nothing

Article 8, Section 24-a of the Texas Constitution prohibits the legislature from imposing any tax on the net incomes of individuals.¹ That ban covers wages, investment income, and every form of retirement distribution: traditional 401k withdrawals, Roth 401k withdrawals, pension payments, and IRA distributions. Voters approved the amendment in 2019, so a state income tax cannot return without another constitutional amendment passing at the ballot box.

The prohibition reaches local governments too. Texas authorizes cities and counties to levy property and sales taxes, but no provision lets any political subdivision tax individual income.¹ You never file a state return for a 401k distribution. The only tax authority involved is the IRS.

What the IRS Takes From a Traditional 401k

Money you put into a traditional 401k went in before income tax was withheld. The trade-off is that the IRS taxes it on the way out. Every dollar you withdraw gets added to your other income for the year, and the total determines your federal bracket.²

For 2026, the federal brackets for single filers are:

10% on taxable income up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Married couples filing jointly see roughly doubled thresholds: the 10% bracket covers the first $24,800, the 12% bracket runs to $100,800, and the 37% rate kicks in above $768,700.³ These are marginal rates. A single filer withdrawing $60,000 doesn’t pay 22% on all of it. The first $12,400 is taxed at 10%, the next slice at 12%, and only the portion above $50,400 at 22%.

Before any bracket applies, you subtract the standard deduction. For 2026 that’s $16,100 for single filers and $32,200 for married couples filing jointly.³ A married couple taking $50,000 in distributions with no other income would subtract $32,200 first, leaving only $17,800 subject to federal tax.

Retirees 65 and older get an additional break. For tax years 2025 through 2028, a $6,000 enhanced deduction per qualifying person is available on top of the standard deduction, or $12,000 if both spouses are 65 or older. It phases out for single filers with modified adjusted gross income above $75,000 and joint filers above $150,000.⁴ For a 66-year-old single retiree with $60,000 in income, the combined deductions can shield more than $22,000 from federal tax. Running the numbers before you request a distribution can keep you in a lower bracket.

The 20% Withholding Rule

When you take a distribution from a traditional 401k that could have been rolled over to another retirement account, your plan administrator must withhold 20% for federal taxes. You cannot opt out.⁵ On a $50,000 withdrawal, $10,000 goes straight to the IRS and you receive $40,000.

That 20% is a prepayment, not your final bill. If your actual tax rate turns out lower, the difference comes back as a refund. If your total income pushes you into a higher bracket, you owe more. Required minimum distributions and hardship withdrawals skip the 20% withholding, though they still owe federal income tax under the normal rules.⁵ Your plan sends Form 1099-R early the following year showing the gross distribution and the taxes withheld.⁶ Because Texas has no income tax, there’s no state form to file alongside it.

Roth 401k Withdrawals

Roth 401k contributions were taxed on the way in, so qualified withdrawals come out tax-free at both the federal and state level. A distribution is qualified if you’ve held a Roth account in the plan for at least five tax years and you’re at least 59½, disabled, or the distribution is paid to a beneficiary after your death.⁷

If you take money out before meeting those conditions, the withdrawal splits in two. The portion representing your original contributions comes out tax-free because you already paid tax on it. The earnings portion gets included in your gross income and taxed at your ordinary rate.⁷ The five-year clock starts on the first day of the tax year you made your initial Roth contribution to that specific plan.

The 10% Early Withdrawal Penalty

Taking money from a traditional 401k before age 59½ triggers an additional 10% tax on top of ordinary income tax.⁸ On a $50,000 early withdrawal, that’s $5,000 in penalty before you even run the regular tax. Combined with a 22% or 24% marginal rate, you can lose roughly a third of the distribution to the IRS. You report the penalty on Form 5329 with your federal return.

Exceptions That Waive the Penalty

Several situations let you withdraw before 59½ without the extra 10%. Ordinary income tax still applies; these exceptions only drop the penalty.

Separation from service in or after the calendar year you turn 55. Distributions from that employer’s plan are penalty-free. It only applies to the plan at the employer you left, not to old 401k accounts from previous jobs.²
A series of substantially equal periodic payments based on your life expectancy. Once started, you must continue for at least five years or until you reach 59½, whichever is longer.⁸
Permanent and total disability.
Unreimbursed medical expenses above 7.5% of your adjusted gross income.
Terminal illness certified by a physician as expected to result in death within 84 months. Repayment is allowed within three years.
Emergency personal expenses under SECURE 2.0, up to $1,000 per year, with no further emergency distribution from the same plan for three years unless you repay the first.

The age-55 separation rule is the one most people overlook. If you’re planning early retirement in Texas, leaving money in your current employer’s 401k rather than rolling it to an IRA keeps that penalty-free access open.

Hardship withdrawals are a separate matter. Qualifying for one gets you access to the money, but it doesn’t exempt you from the 10% penalty unless you also meet one of the exceptions above.⁹

Required Minimum Distributions at 73

You can’t leave money in a traditional 401k forever. Once you reach age 73, you must begin taking required minimum distributions each year. If you’re still working and don’t own 5% or more of the company sponsoring the plan, you can delay RMDs from that employer’s 401k until you actually retire.¹⁰

Missing an RMD is expensive. The IRS imposes a 25% excise tax on the amount you should have withdrawn. On a $20,000 RMD, that’s a $5,000 penalty. If you correct the mistake within about two years by taking the missed distribution and filing an updated return, the penalty drops to 10%.¹¹ Regular federal income tax still applies to the distribution itself.

Rolling Over Without Triggering Tax

If you’re changing jobs or retiring but don’t need the cash yet, rolling your 401k into another retirement account avoids tax entirely on the transferred amount. A direct rollover, where your plan administrator sends the money straight to the new plan or IRA, triggers no withholding and no tax.¹² This is the cleanest option.

If the distribution is paid directly to you, you have 60 days to deposit it into another qualified plan or IRA to avoid taxation. The complication is that your plan already withheld 20% and sent it to the IRS, so rolling over the full original amount requires you to come up with that 20% from other funds. Rolling over only the 80% you received turns the withheld portion into a taxable distribution, with the early withdrawal penalty on top if you’re under 59½.

Moving to Texas Before You Withdraw

Federal law blocks any state from taxing the retirement income of someone who doesn’t live there. If you built your 401k while working in a state with income tax and then moved to Texas before taking distributions, your former state cannot collect. The federal definition of retirement income specifically includes 401k plans and other accounts held in qualified trusts.¹³

Establishing Texas residency before withdrawals begin is the key step. Registering to vote in Texas and obtaining a Texas driver’s license are common ways to show your permanent home is here. Once residency is established, where you originally earned the money is irrelevant for state tax purposes. The same protection reaches beneficiaries: if you live in Texas and inherit a 401k from someone who worked in a high-tax state, that state cannot tax the distributions you receive.

The federal protection covers pension income, 401k distributions, IRA withdrawals, and similar retirement plan payouts. It does not cover non-retirement income like deferred compensation or stock options, so anyone relocating to Texas with a complex compensation package should check which income streams qualify.

1
State of Texas. Texas Constitution Article 8 – Taxation and Revenue
2
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. 2026 Filing Season Updates and Resources for Seniors
5
Internal Revenue Service. Pensions and Annuity Withholding
6
Internal Revenue Service. About Form 1099-R
7
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
8
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
9
Internal Revenue Service. Retirement Topics – Hardship Distributions
10
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
11
Office of the Law Revision Counsel. 26 U.S. Code 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
12
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
13
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income