Early withdrawal under 401k will treated as ordinary income and hence taxable. Such withdrawal from 401 (k) or other retirements plans attract additional tax up to 10%. Besides the withdrawn amount also be included in the taxable income. In addition to regular income tax, 10% is levied on the early distribution out of 401k plan. It means penalty up to 10% levied on early withdrawals. However such penalty on early withdrawal is subject to some exceptions. For example, the penalty is not levied on if the contributor is unemployed and paid health insurance premium. Besides the penalty also not levied if the amount is aid for college expenses of self or dependent.
Therefore if a person withdrawing $5,000 from 401k plan at the age of 45, the penalty of $500 will be levied. Besides such $5,000 also to be included to the taxable income. In order to avoid penalty, the contributor can borrow from 401k plan. But the loan must be repaid within 5 years. In case the employee leaves the current employer, the employee forced to repay the entire loan within short period. Still the withdrawal of $5,000 must be included in the total taxable income. When the person reaches at the age of 59 1/2, the person can choose to withdrawal money from the 401k account. It avoids penalty of 10%, but taxes are to be levied on withdrawal as a taxable income.
In order to avoid penalty for early withdrawal, the contributor should not take early withdrawal from 401k plan until reaches to the minimum age. The holder cannot access the account for regular withdrawal till the person reached to the age of 59 years and 6 months. However if a person at the age of 55 or over and quit the job can make early withdrawal from 401k. Even old funds in 401k from the past employers cannot be utilized and instead the holder should ask the employer to receive funds in the form of check to deposit in new 401k.account. The person who is in receipt o such income must deposit within 60 days of the receipt of the income.
Moreover, the early withdrawal under 401k raises the total income of the year and the taxpayer falls into higher income tax bracket. The situation may arise to the taxpayer to make early withdrawal from 401k in certain situations. In case no other option left over, the tax payer needs to pay 10% additional tax besides inclusion of such withdrawal in total taxable income.