Q:

What are the costs of early withdrawal from a 401k?

A:

Quick Answer

The costs of an early withdrawal from a 401(k) retirement plan are a standard income tax and a 10 percent penalty tax on the entire amount withdrawn, reports the IRS. The 10 percent penalty tax is waived if the early distribution qualifies as an exception.

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Full Answer

Normally, withdrawals from 401(k) accounts made before the account holder is 59 1/2 are categorized as early distributions, according to the IRS. However, an account holder retiring at age 55 or over can withdraw funds penalty-free only from the 401(k) plan at the company from which he retires, states About.com.

The permanent disability of the account holder qualifies as an exception to the early distribution penalty, as reported by the IRS. A withdrawal of 401(k) funds for the payment of medical bills that total 10 percent or more of the account holder's adjusted-gross income is penalty-free. Account holders can take penalty-free early distributions to pay bills owed to the IRS, as well.

Another method of avoiding the 10 percent penalty tax on early 401(k) distributions is by initiating a series of substantially equal, periodic payments, according to U.S. News & World Report Money. The payments are based on the life expectancy of the account holder. They must continue for at least five years or until the account holder is 59 1/2, whichever is longer.

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