401K Early Withdrawal Penalties

Employees can use a 401k plan to help them save for retirement. However, the Internal Revenue Service limits early withdrawals from the plan, and imposes additional penalties on early withdrawal on top of the income taxes.

Penalty

The IRS imposes a 10 percent early withdrawal penalty on withdrawals taken from a 401k plan. Early withdrawals refer to any withdrawal taken before the account holder turns 59 1/2 years old. For example, if you took a $3,000 early withdrawal, you must pay a $300 penalty unless an exception applies.

Exceptions

The IRS does not impose the 10 percent early withdrawal penalty in several circumstances, including if you die and your beneficiary takes a withdrawal, you suffer a permanent disability or you are at least 55 years old when you retire.

Time Frame

Unlike an individual retirement accounts, which permits early withdrawals for any reason, you can only take an early withdrawal from your 401k plan if you leave your job, suffer a permanent disability or have a financial hardship.

References

• IRS: General Distribution Rules
• IRS: Publication 590