At 60 He’ll Pull $40,000 From His 401(k) to Buy a Truck. The Plan Will Hold Back 20% Before He Sees a Dime, and His Real Tax Bill May Be Bigger Than That

He’s 60, he’s found the truck, and the sticker says $40,000, so he logs into his 401(k) and asks for that exact amount. A week later, the money lands, but it’s only $32,000. Then in April, the IRS may ask him for more.

This is an all-too-common scenario. One retired caller to Clark Howard’s show described the same argument he and his wife were having: whether to withdraw $30,000 from retirement accounts to buy a car outright or take out a loan. The numbers are bigger now, but the trap works the same way.

Why the Plan Keeps 20% Before He Sees a Dime

If a 401(k) pays money straight to you, federal law requires the plan to hold back 20% for taxes (26 U.S.C. § 3405(c)(1)(B)). He can’t check a box to skip it. The only way around it is to have the money sent directly to another retirement account, like an IRA (§ 3405(c)(2)).

One piece of good news: he’s past age 59½, so the 10% early-withdrawal penalty doesn’t apply (§ 72(t)(2)(A)(i)). Every dollar still gets taxed as ordinary income, like a paycheck (§ 402(a)).

His Tax Bracket Decides Whether 20% Covers the Bill

Think of the withholding as a down payment on his tax. What he actually owes depends on his bracket. For 2026, single taxpayers get a $16,100 standard deduction. They pay 22% on taxable income over $50,400 and 24% on taxable income over $105,700.

Suppose, say, he’s single and retired, with $90,000 a year coming in from a pension and some consulting. That puts his taxable income at $73,900 before the truck. To clear $40,000 after withholding, he has to request $50,000. The plan sends $10,000 of that to the IRS.

That $50,000 moves $18,200 of his income into the 24% bracket. His federal tax on the withdrawal comes to about $11,364, so he owes roughly $1,364 more when he files. If his state has an income tax, it’ll want a share too.

One Big Income Year Spills Into Health Costs and Benefits

• Marketplace coverage: If he retired before Medicare and buys his own insurance, his premium help depends on that year’s income. A one-time $50,000 jump can reduce that help.
• Medicare premiums: Medicare sets premiums using your tax return from two years prior. In 2026, single taxpayers above $109,000 pay more than the standard $202.90 a month for Part B, starting at $284.10. At 60, he’s safe, but a big withdrawal at 63 or later would show up on his Medicare bill.
• Social Security: Once he’s collecting, benefits start getting taxed when half his benefit plus his other income goes over $25,000 for a single taxpayer, and more of the benefit is taxed past $34,000 (§ 86(c)). A large withdrawal makes more of his benefit taxable.

Cheaper Ways to Get the Keys

1. Split it across two tax years. He takes $25,000 in December and $25,000 in January. His taxable income in each year tops out at $98,900, which is under the 24% line. His federal tax drops to $11,000, saving $364. That’s small, but splitting does more good when health subsidies or Medicare brackets are on the line.
2. Roll it to an IRA first. A direct rollover means no withholding. IRA withdrawals default to 10% withholding, and he can choose a different amount or skip it entirely (§ 3405(b)(2)(A)). That lets him set withholding to match his real bracket.
3. Use cash or a taxable brokerage account. When you sell investments in a regular account, only the profit gets taxed. Cash in the average 1-year CD pays just 2%, so using it costs him very little in lost interest.
4. Take a 401(k) loan if he’s still working. A loan within the legal limits doesn’t count as a taxable withdrawal (§ 72(p)(2)). If he’s already left the job, it depends on the plan’s rules. Some plan sponsors let former employees keep paying off old loans, but many won’t let them take out new ones.
5. Finance is part of it. A small car loan lets his 401(k) keep growing and spreads the cost over several years.

The best move is to roll the money into an IRA and then withdraw it across two tax years, with withholding set to match his bracket. Asking the 401(k) for the full amount at once is the worst option.

He loses 20% up front, maybe gets hit with another bill in April, and has nothing to show for the extra income except higher costs. This is one of several IRS rules that quietly cost retired people real money, and we mapped the rest in a free guide to the traps that drain retirement accounts.

Ask the Plan This 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 does the transfer take?” If the answer is zero withholding and a couple of weeks, he can control his own tax bill and still be driving the truck before winter.

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