Frequently asked questions
What is the 10% early withdrawal penalty?
The IRS charges a 10% penalty on distributions from a 401k, IRA, or similar tax-advantaged account taken before age 59½. This is on top of ordinary income tax. So if you're in the 22% bracket, you're effectively paying 32% just on the penalty + federal portion — not counting state tax.
Are there ways to avoid the penalty?
Yes — IRS exceptions include: permanent disability, substantially equal periodic payments (SEPP/72t), qualified medical expenses over 7.5% of AGI, health insurance premiums during unemployment, first-time home purchase (IRA only, $10k lifetime limit), and a few others. A 401k also allows penalty-free withdrawals at age 55 if you leave your job that year (the "Rule of 55").
What happens to the taxes?
Traditional 401k withdrawals are fully taxable as ordinary income — the money was contributed pre-tax. The withdrawal amount gets added to your income for the year, which can push you into a higher bracket. Your employer or plan custodian typically withholds 20% automatically, but you may owe more at tax time.
Is a Roth 401k different?
Yes — Roth 401k contributions were made after-tax, so you can withdraw your contributions (not earnings) at any time without tax or penalty. Earnings on a Roth 401k are subject to the 10% penalty and taxes if withdrawn before 59½ and before the account is 5 years old.
What are alternatives to early withdrawal?
Many 401k plans allow loans of up to 50% of your vested balance (max $50,000). You repay yourself with interest — no taxes or penalty unless you default. A personal loan or HELOC may also be cheaper than the combined tax hit of an early withdrawal.