Retirement Retirement Planning

6 Hidden Tax Traps Lurking Inside Some 401(k)s in 2026

These lesser-known 401(k) rules can affect your tax payments.

By Catherine Collins

Edited by Andrea Basse

Updated Jan. 16, 2026

People know the basics of 401(k) retirement plans because they're among the most widely used and well-known retirement accounts. What fewer people know is that some hidden tax rules can impact take-home pay, and more importantly, how much their taxes will be. If you are someone who regularly invests in a 401(k), here are some specific 401(k) rules you should know about if you want to protect your nest egg.

Some of these rules are new for 2026 and will impact millions of workers. So, keep reading to make sure you're up to date.

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Required minimum distributions (RMDs) can impact your taxable income

No one can keep their retirement investments in their 401(k) forever. The IRS requires people to take withdrawals from their 401(k)s when they reach age 73. Not everyone has the same required minimum distribution. You'll have to use a worksheet to figure out what you owe, and it's important that you do because you'll have to pay extra taxes if you withdraw too little.

These required minimum distributions can increase your overall taxable income, especially if you have multiple income streams or if your spouse is still working. It's important to speak with your accountant to see how much taking withdrawals will impact you at tax time.

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Traditional pre-tax 401(k)s are taxed at retirement

If you contribute to a traditional 401(k) using pre-tax dollars, the IRS states that you must include your distributions as income. When you add your withdrawals to other income streams, including Social Security income, that can increase the amount of taxes you pay.

If you contributed to a Roth 401(k), however, those withdrawals are not taxed at retirement as long as you meet specific criteria.

New catch-up contribution rules affect high earners

As of 2026, employees who are age 50 or older can now make catch-up contributions of $8,000, an increase from previous years. If you're between the ages of 60 and 63, you can contribute an extra $11,250.

The big change affecting high earners is that if you make more than $150,000 a year, you must make your catch-up contributions to a Roth account. So, high earners who typically used catch-up contributions to lower their taxable income will not be able to do that in 2026. The upside is that Roth withdrawals are not taxable when you retire, as long as you follow Roth guidelines.

Rolling over a 401(k) can impact taxes

If you leave your job and roll over money from your 401(k), there are specific rules you need to follow. Sometimes, people make direct rollovers where the distribution moves directly from one plan to another.

However, sometimes people receive the distribution and then have 60 days to deposit it in a new account themselves. If you missed the 60-day deadline, that can impact the amount you have to pay in taxes. You can be charged for an early distribution if you're under age 59.5, too. So, make sure that you follow all rules and guidelines when rolling over a 401(k).

401(k) withdrawals affect Social Security taxes

Taking your 401(k) distributions will not reduce your Social Security benefits. However, those withdrawals do add to your overall income, and if you make above certain thresholds, you might have to pay taxes on some of your Social Security benefits.

If you're not sure how your 401(k) withdrawals will impact your taxes once you start taking your Social Security benefits, it's a good idea to work with a financial planner and an experienced accountant who can give you advice on how your withdrawals will affect your taxes in the future.

States have different 401(k) income tax laws

Although everyone has to pay federal income taxes, the state you live in can determine whether or not you have to pay taxes on your 401(k) withdrawals in retirement. In fact, there are 13 states that don't tax your 401(k) withdrawals: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, Illinois, Iowa, Mississippi, and Pennsylvania.

Living in one of these states means you could pay less state income taxes than you would living elsewhere because of these generous retirement income tax laws.

Why you shouldn't ignore these tax traps

People focus so much on increasing their 401(k) balances that they don't think about the tax implications of withdrawing their earnings in retirement. However, ignoring these tax laws can cause you to have to pay much more at tax time than expected. That's why it's important to plan ahead and get advice from a professional if you need it.

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Bottom line

Consistently investing in a 401(k) over the course of your career is still one of the best ways to retire comfortably. However, it's important to understand the fine print, especially when it comes to how your 401(k) distributions affect how much of your income you get to keep and what percentage you have to pay at tax time.

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