What Is the Tax Penalty for 401k Withdrawal?


Quick Answer

There is an additional 10 percent tax penalty for early withdrawals from a 401(k) retirement plan as of 2015, according to the Internal Revenue Service. This additional tax applies to distributions from qualified 401(k) plans prior to the owner of the plan reaching age 59½.

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Full Answer

The goal of this tax penalty is to discourage taxpayers from using retirement funds for purposes beyond retirement, notes the IRS. However, there are some exceptions to this penalty. For example if a taxpayer leaves an employer in or after the year in which he turns 55, then he may not be subject to the early withdrawal penalty. Distributions made by a taxpayer who is permanently and totally disabled are not penalized, and distributions made to an estate’s beneficiary after the taxpayer’s death are also not penalized. When a taxpayer has medical expenses in excess of 10 percent of the taxpayer’s adjusted gross income or 7.5 percent of income if the taxpayer or the taxpayer’s spouse is age 65 or over, distributions taken are also exempt from the added penalty.

More details about the added tax on early distributions from individual retirement accounts, including 401(k) and other plans is addressed fully in Topic 558. This topic is available in its entirety on the IRS website.

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