Q:

What are the penalties for cashing out a 401(k)?

A:

Quick Answer

Penalties for cashing out a 401(k) before retirement age can include federal and state taxes as well as an early withdrawal penalty. Individuals that have not reached the age of 59-and-a-half incur a 10 percent early withdrawal penalty.

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Full Answer

The exact amount of tax penalties can vary based on whether or not an individual has to pay state income taxes in addition to federal taxes. Some 401(k) plan administrators withhold up to 20 percent of a withdrawal and send the funds directly to the IRS to cover the tax payment. Individuals that do not have to pay state income tax on a withdrawal may have a federal tax penalty of 10 percent.

There are certain exceptions when the early distribution tax may be eligible for a waiver by the IRS. Examples of this include the total and permanently disability or death of the account holder. Withdrawals for the purpose of paying an alternate payee under a Qualified Domestic Relations Order are also exempt from the early distribution tax. A plan that is subject to an IRS levy also qualifies for an exemption. The IRS also imposes a 25 percent tax versus the 10 percent tax on withdrawals that are made within the first two years of 401(k) plan participation.

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