Why Is 401K Taxed? 
A 401 -LRB- K -RRB- defined contribution plan is a tax DEFERRED program instituted by your employer . Contributions by you to the plan are normally tax deferred , meaning that there isnt any current income tax on that portion of your income . -RRB- The same is true if your employer makes a contribution . When the funds are withdrawn they are taxable as ordinary income under most circumstances . A distribution before you reach age 50.5 could incur an additional 10 % penalty tax . 