The penalty for withdrawing money early from a 401(k) plan-meaning before age 59½-is generally a 10% additional tax on the amount withdrawn. This penalty is on top of the regular federal income taxes you must pay on the distribution, as the withdrawal is treated as taxable income
. There are some exceptions where the 10% penalty can be avoided, such as:
- If you become totally and permanently disabled.
- If you have unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
- If you separate from your employer at age 55 or older (the "Rule of 55"), allowing penalty-free withdrawals from that employer’s plan.
- Certain hardship distributions, though these often still incur the penalty unless they meet specific criteria.
- New provisions under the Secure 2.0 Act allow limited penalty-free emergency distributions starting in 2024.
- Other exceptions include withdrawals for qualified domestic abuse victims, federally declared disaster areas, and terminal illness
If you withdraw early without qualifying for an exception, you pay the 10% penalty plus ordinary income tax on the amount withdrawn. State taxes may also apply depending on where you live
. In summary:
- Early withdrawal penalty: 10% of the amount withdrawn.
- Plus ordinary income tax on the withdrawal.
- Exceptions exist but are limited and specific.
This penalty is designed to discourage early use of retirement funds and to encourage saving for retirement
