The penalty for withdrawing from a 401(k) early-meaning before age 59½-is generally a 10% additional tax on the amount withdrawn. This penalty is on top of the ordinary federal income taxes you owe on the distribution, as the withdrawn amount is treated as taxable income
Key details about early withdrawal penalties:
- Standard penalty: 10% early withdrawal tax.
- Additional taxes: Federal income tax plus possibly state income taxes.
- Age threshold: Penalty applies if you withdraw before age 59½.
- Exceptions: Certain situations allow penalty-free withdrawals, including:
- Disability
- Qualified hardship distributions (e.g., medical expenses, tuition, buying a primary residence, funeral expenses)
- Separation from employment at age 55 or older (the "Rule of 55")
- Federally declared disaster losses
- Other IRS-specified exceptions
Consequences beyond the penalty:
- Early withdrawal reduces your retirement savings and the potential for compound growth.
- You may lose employer matching contributions if you take a hardship withdrawal.
- Taxes and penalties can significantly reduce the amount you actually receive from the withdrawal
Summary:
If you withdraw from your 401(k) before age 59½ without qualifying for an exception, you will pay a 10% penalty plus income taxes on the withdrawal amount. Some exceptions and special rules can help avoid the penalty, but these are limited and specific
