Q:

What is a 401(k) early withdrawal?

A:

Quick Answer

A 401(k) early withdrawal is any withdrawal that happens before the individual is 59 1/2 years old, states CNN Money. Early withdrawals are subject to an additional 10 percent tax penalty on top of the income tax that must be paid on the withdrawal.

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Full Answer

The terms for early withdrawals from a 401(k) vary by plan. Many plans allow withdrawals for hardships such as disability, home purchase or repair, education expenses and some medical expenses, advises CNN Money. Many 401(k) plans allow customers to withdraw up to 50 percent of the funds as a loan that they must then repay from their pay check with interest. However, if the person quits or is fired from his job, the loan becomes immediately due.

Customers can take early withdrawals without paying the penalty tax using the Internal Revenue Service's Rule 72(t), states CNN Money. Under this plan, individuals receive a fixed amount from their 401(k) based on their life expectancy. The younger a person is when he begins withdrawing funds, the lower the payment amount is, because he has a longer life expectancy. The IRS still charges income tax on these withdrawals.

Under certain circumstances, individuals can take early withdrawals without paying the penalty, states the IRS. Some of these circumstances include total and permanent disability, distributions to beneficiaries after the individual dies, and distributions due to an IRS levy of the plan.

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