When you withdraw money from a 401(k) account before you reach age 59½, you’ll typically have to pay a 10% penalty on the amount you withdraw. This penalty is in addition to any income taxes you may owe on the withdrawal. For example, if you withdraw $10,000 from your 401(k) before you turn 59½, you’ll have to pay a $1,000 penalty, plus any income taxes you owe on the $10,000.
Federal Income Tax
If you withdraw money from your 401(k) before you reach age 59½, you will typically owe federal income tax on the amount you withdraw. The tax rate will be the same as your marginal income tax rate, which is the rate you pay on your last dollar of taxable income. Here are some important things to know about paying taxes on your 401(k) withdrawal.
- The amount of tax you owe will depend on how much money you withdraw and what your marginal tax rate is.
- You can use the IRS’s 401(k) Withdrawal Tax Calculator to estimate how much tax you will owe.
- If you withdraw money from a traditional 401(k), you will also have to pay a 10% early withdrawal penalty.
However, there are some exceptions to the 10% early withdrawal penalty. You will not have to pay the penalty if you:
| Reason | Condition |
|---|---|
| Disability | You are disabled and unable to work. |
| Substantially equal payments | You take substantially equal payments from your 401(k) over your life expectancy. |
| First-time home purchase | You use the money to buy your first home. |
| Higher education expenses | You use the money to pay for qualified higher education expenses. |
| Medical expenses | You use the money to pay for unreimbursed medical expenses that exceed 10% of your AGI. |
| Birth or adoption | You use the money to pay for the birth or adoption of a child. |
| Death | You inherit the 401(k) from someone who died. |
State Income Tax
The penalty for withdrawing from a 401(k) plan early depends on several factors, including the amount you withdraw and the state in which you live. In general, you will have to pay a 10% penalty on the amount you withdraw, as well as income tax on the amount you withdraw. However, there are some exceptions to this rule. For example, you may not have to pay the 10% penalty if you withdraw the money to pay for qualified expenses, such as medical expenses or college tuition.
The following table shows the state income tax rates for 2022.
| State | Income Tax Rate |
|---|---|
| Alabama | 4%** |
| Alaska | 0% |
| Arizona | 2.9% |
| Arkansas | 6.65% |
| California | 1% to 13.3% |
| Colorado | 4.55% |
| Connecticut | 3% |
| Delaware | 0% |
| Florida | 0% |
| Georgia | 5.75% |
| Hawaii | 1% to 11% |
| Idaho | 0% |
| Illinois | 4.95% |
| Indiana | 3.23% |
| Iowa | 0% |
| Kansas | 2.3% |
| Kentucky | 6% |
| Louisiana | 0% |
| Maine | 5.8% |
| Maryland | 3% to 5.75% |
| Massachusetts | 5% |
| Michigan | 4.25% |
| Minnesota | 7.85% |
| Mississippi | 5% |
| Missouri | 0% |
| Montana | 0% |
| Nebraska | 0% |
| Nevada | 0% |
| New Hampshire | 0% |
| New Jersey | 5% |
| New Mexico | 4.9% |
| New York | 4% to 8.82% |
| North Carolina | 2.5% to 5.25% |
| North Dakota | 0% |
| Ohio | 3.99% |
| Oklahoma | 4.75% |
| Oregon | 9.9% |
| Pennsylvania | 3.07% |
| Rhode Island | 3.75% |
| South Carolina | 0% |
| South Dakota | 0% |
| Tennessee | 0% |
| Texas | 0% |
| Utah | 4.95% |
| Vermont | 3.55% |
| Virginia | 2% to 5.75% |
| Washington | 0% |
| West Virginia | 3% |
| Wisconsin | 4% |
| Wyoming | 0% |
As you can see, the state income tax rates vary significantly from state to state. This means that the amount of penalty you will have to pay on a 401(k) withdrawal will also vary depending on the state in which you live.
If you are considering withdrawing from your 401(k) plan, it is important to factor in the state income tax that you will have to pay. You should also be aware of the 10% penalty that may apply. By understanding these factors, you can make an informed decision about whether or not to withdraw from your 401(k) plan.
401k Withdrawal Penalties
Withdrawing money from a 401(k) before age 59½ can trigger a 10% penalty from the Internal Revenue Service (IRS). This applies to both regular withdrawals and loans.
Additional Fees
In addition to the IRS penalty, you may also incur other fees from your 401(k) provider. These fees can vary depending on the provider, but they may include:
- Early withdrawal fee
- Processing fee
- Wire transfer fee
Avoiding the Penalty
There are a few ways to avoid the 10% penalty on 401(k) withdrawals:
- Wait until you reach age 59½ to withdraw money.
- Take a loan from your 401(k) instead of a withdrawal. Loans must be repaid within five years, but they are not subject to the 10% penalty.
- Withdraw money from a Roth 401(k). Withdrawals from Roth 401(k)s are not subject to the 10% penalty, but they may be subject to income taxes.
Withdrawal Penalties by Type
| Withdrawal Type | Penalty |
|---|---|
| Regular withdrawal | 10% + provider fees |
| Loan | None, if repaid within 5 years |
| Roth withdrawal | None + income taxes, if applicable |
Thanks for sticking with me through this little adventure! I know 401(k) withdrawals can be a bit of a headache, but hopefully, you now have a better understanding of the potential penalties involved. If you have any more questions, feel free to drop me a line. In the meantime, keep saving for the future – and try to avoid those early withdrawals if you can! Catch you later!