If you withdraw money early from your 401(k) before age 59½, you generally face two main tax consequences:
- Income Tax: The amount withdrawn is added to your taxable income for the year and taxed at your ordinary federal income tax rate, which in 2025 ranges from 10% to 37% depending on your total income bracket. State income taxes may also apply depending on where you live
- Early Withdrawal Penalty: In addition to income tax, the IRS typically imposes a 10% penalty on the amount withdrawn if you are under 59½. This penalty is designed to discourage early use of retirement funds
For example, if you withdraw $10,000 early, you might pay $1,000 in penalty plus $1,000 to $3,700 in federal income taxes depending on your tax bracket, plus any applicable state taxes
. There are exceptions where the 10% penalty can be waived, such as:
- Disability
- Certain medical expenses
- Separation from employment after age 55
- Qualified domestic relations order (divorce)
- Birth or adoption expenses (up to $5,000)
- Hardship distributions approved by the plan
- Special emergency distributions up to $1,000 per year under the Secure 2.0 Act
- Other IRS-specified exceptions
Even if the penalty is waived, you still owe regular income tax on the withdrawal unless it is from a Roth 401(k) that meets qualified distribution rules
. In summary, an early 401(k) withdrawal typically results in ordinary income tax plus a 10% penalty unless you qualify for an exception. The combined tax and penalty can significantly reduce the amount you receive and impact your retirement savings.
