The penalty for early withdrawal of funds from 401(k) accounts is 10 percent of the amount included in gross income in addition to regular income tax, reports the IRS. There are a number of exceptions to the 10 percent early withdrawal tax.Continue Reading
When 401(k) account holders reach the age of 59 1/2, they can initiate regular distributions from their account without penalty, according to the IRS. Employees who separate from service at age 55 or over also qualify for penalty-free 401(k) withdrawals. Other 401(k) holders can take hardship distributions, but the 10 percent penalty applies unless they have become completely and permanently disabled, have medical expenses that total more than 10 percent of their adjusted gross income, or use the money to pay off a debt to the IRS. The penalty is also waived for reserve military personnel called up for active duty for 180 days or more.
One alternative to withdrawing money early from a 401(k) plan is to take out a loan on the account, states CNN Money. However, the loan must be paid back to the account with interest, and most plans preclude further contributions to the 401(k) until the loan is repaid. Account holders can also take penalty-free withdrawals in the form of substantially equal periodic payments, as reported by Bankrate. However, the payments must continue for at least five years or until the account holder reaches 59 1/2, whichever is longer, even if the withdrawals are no longer needed.Learn more about Financial Planning