How Does Someone Calculate the Early Withdrawal Penalties for a 401(k)?


Quick Answer

Calculating the penalties of an early withdrawal from a 401(k) is done using the amount a person wants to withdraw, federal income tax rate, state income tax rate, age of retirement, number of years before retirement, which applies to people who have not retired, and the expected rate of return. A person can also opt to use online applications that help in determining the penalties.

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Full Answer

As of January 2015, the government charges 10 percent on any withdrawal made from 401(k) before a person gets to 59 1/2 years of age. However, if a person is using the money to solve hardships, buy a first home or meet higher education expenses, he or she may get a waiver of that penalty. It is important to note that the IRS does not consider being broke as a hardship. A person also needs to know his or her minimum distribution.

The IRS provides 12 exceptions that allow a person to avoid the penalty. A person is only required by law to start withdrawing from 401(k) account once he or she is 70 1/2 years old. If an individual is still working at 70 1/2 years of age, he or she can postpone withdrawals until April 1 of the following year.

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