All withdrawals from traditional 401(k) accounts are subject to income tax, reports the IRS. Early withdrawals are subject to a 10 percent penalty tax. When account holders reach 70 1/2, they must take required minimum distributions or pay a 50 percent penalty tax on the amount they should have withdrawn.
Both the contributions and gains of traditional 401(k) accounts are subject to income tax at the current rate at time of withdrawal, according to CNN Money. Only Roth 401(k) accounts are taxed at the time of contribution instead of distribution. Although account holders are allowed to withdraw funds before they reach 59 1/2 for hardship situations, they must pay a 10 percent penalty unless the withdrawals qualify as exceptions. Those who retire early can begin penalty-free distributions at age 55, states the IRS. Other early withdrawal exceptions include the permanent disability of the account holder, medical bills over 10 percent of adjusted gross income, payment of IRS levies, the initiation of a series of substantially equal payments or reservists being called to active duty.
Although account holders can defer withdrawing 401(k) funds until they are 70 1/2, they must initiate required minimum distributions by April 1 of the following year or face significant penalties, as reported by the IRS.