The 401K tax penalty for early cash out is 10 percent of the amount of the distribution, which is in addition to the full amount of the regular income tax on the cash out. However, there are a number of exceptions that preclude the collection of the 10 percent penalty.Continue Reading
A 401K retirement account holder under the age of 55 must pay the 10 percent penalty when cashing out the account. However, the penalty is waived if the account holder becomes completely disabled, dies, has a substantial medical expense, must use the money to pay alimony or child support, or has a levy on the 401K account from the IRS. Military reservists called to extended active duty can also cash out 401K accounts without penalty. Another tax drawback of cashing out a 401K account early is that the extra income may put account holders into a higher tax bracket, making them subject to a higher income tax payment.
Instead of cashing out the account, 401K account holders can borrow up to $50,000 or half of the account's balance and pay it back with interest over five years without incurring the 10 percent penalty. Account holders can also opt for a series of substantially equal periodic payments over their expected lifetimes as long as they are no longer working for the employers maintaining the plans before payments begin.Learn more about Financial Planning
IRA plan owners must pay a 10 percent penalty tax in addition to standard income tax when they take early withdrawals from their plans, explains the Internal Revenue Service. However, if the withdrawal qualifies as an exception, the penalty tax is waived.Full Answer >
Account holders can withdraw money from Simple IRAs at any time, but if they are under 59 1/2 years old, the distribution is subject to a penalty tax of 10 percent or more, reports the IRS. Account holders who turn 70 1/2 must initiate required minimum distributions or face penalties.Full Answer >
If the individual wishing to withdraw from an IRA is under the age of 59 1/2 and does not want to face a 10 percent tax penalty, the withdrawal must go toward a major expense, such as college tuition, says CNN Money. The individual can also withdraw a former contribution.Full Answer >
An individual must pay an early IRA withdrawal tax penalty of 10 percent if he is not over the age of 59 1/2 and does not meet the qualifications for the exceptions stated in Publication 590-B, according to the Internal Revenue Service. Form 1040 is used to determine the penalty.Full Answer >