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How does 401(k) withdrawal affect taxes?

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Quick Answer

Regular 401(k) withdrawals of contributions and gains during retirement are taxed at standard income tax rates, reports CNN Money. Early withdrawals from 401(k) plans are subject to a 10 percent penalty tax, states the IRS. There is another penalty tax for not initiating distributions after age 70 1/2.

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Full Answer

Penalty-free 401(k) distributions typically begin at age 59 1/2, although those who terminate employment at age 55 or over can also take 401(k) withdrawals without penalty, according to About.com. Exceptions to the early withdrawal penalty include the complete disability of the account holder, covering medical bills that total 10 percent or more of adjusted gross income, payment of bills to the IRS and arrangements for substantially equal periodic payments, reports the IRS. Military personnel called from reserve to active duty for 180 days or more can also take penalty-free distributions.

Account holders of 401(k) plans must initiate required minimum distributions by age 70 1/2 or face a 50 percent penalty tax on the amount that should have been withdrawn, according to the IRS. The first distribution must be made by April 1 of the year after the account holder turns 70 1/2. Some plans allow employees over age 70 1/2 to delay initiating distributions without penalty until they retire as long as they own less than 5 percent of the company.

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