401k Early Withdrawal Rules
Several 401k early withdrawal rules apply that smart investors need to be aware of. In general, there are no benefits of cashing out a 401k early, as with most retirement accounts, but there are some work-arounds. Read about them here.
Whenever you withdraw money from a 401k, whether it’s a “premature” distribution or not, you are going to be subject to taxes. The amount of tax that you pay is based on your normal income tax level.
The 401k premature distribution rules state that you must pay an additional penalty on the amount that you withdraw. So if you have $100,000 in your 401k and you withdraw, say, $10,000 of it, you pay taxes of about 20% or $2,000 and you pay a penalty of 10% or $1,000.
So after all is said and done, a $10,000 early withdrawal from a 401k will result in a cash inflow of $7,000, like this:
Withdrawal amount: $10,000
Tax: $2,000 (NOTE: this figure will vary based on your personal tax level)
Penalty (10%): $1,000
Total cash: $7,000
Other 401k early withdrawal rules that may concern you is the fact that there are several situations, that are considered exceptions, in that you don’t have to pay the penalty.
The income tax will be due in almost every situation, but certain exceptions apply to penalty like:
- Death or disability
- Being older than 55 at the time you leave your job
- “Substantially equal payments” – meaning you receive the money in fixed sums over your lifetime.
- Using the cash to pay for medical expenses that were more than 7.5% of your gross income.
- Using the cash to satisfy a divorce or separation agreement.
- Purchasing a home for the first time (NOTE: other exceptions apply to this one)
Of course, your individual situation may make things a bit different.
Read the official 401k early withdrawal rules and other retirement plans from the IRS
Go back to the main 401k Center