Q:

What is the tax penalty for cashing in a 401(k)?

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Quick Answer

The tax penalty for cashing in or withdrawing from a 401(k) before the age of 59 and 1/2 is 10 percent, as stated by Bankrate. However, an individual also has to pay taxes on the income, and that amount depends on the person's income bracket when the amount of the 401(k) is added to the taxable income.

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Full Answer

The reason an individual pays taxes in addition to the penalty for cashing in a 401(k) is because the funds are put into the account on a pretax basis. Since the purpose of the account is to save for retirement, the IRS rules state that if it is pulled out before retirement age, an individual will have to pay taxes and a penalty on the funds. This is to discourage early distribution.

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