When you cash out of your 401k plan, the Internal Revenue Service imposes a 10 percent early withdrawal penalty on the taxable portion of the distribution if you are younger than 59 1/2. This penalty adds to your taxes, rather than replace the income taxes on the cash out. You can avoid the early withdrawal penalty on your 401k plan cash out, but not the income taxes. But this is only if you qualify for an exception such as a permanent disability, or if you are at least 55 years old at the time you retire.
Multiply the percentage of earnings in your account by the amount of your early withdrawal to calculate the nontaxable portion of your Roth 401k plan distribution. For example, if your 401k plan has 40 percent earnings and you cash out $30,000, $12,000 is taxable. If you have a traditional 401k plan, the entire amount is taxable.
Subtract an amount of your cash out exempt from the early withdrawal penalty from the total taxable portion of the withdrawal. For example, if you have a taxable distribution of $12,000 but you have $3,000 in medical bills exceeding 7.5 percent of your adjusted gross income, only $9,000 of your 401k cash out is subject to the early distribution penalty.
Multiply the amount of your 401k plan cash out by 0.1 to calculate the penalty for your 401k cash out. In this example, multiply $9,000 by 0.1 to find your early withdrawal penalty is $900.
- IRS.gov: General Distribution Rules
- IRS.gov: Retirement Plans FAQs regarding Hardship Distributions
- IRS.gov: Retirement Plans FAQs on Designated Roth Accounts
- IRS.gov: Form 5329 Instructions
- IRS. “What if I Withdraw Money From My IRA?” Accessed July 7, 2020.
- IRS. ”Topic No. 413 Rollovers From Retirement Plans.” Accessed July 7, 2020.
- U.S. Department of Labor. “FAQs About Retirement Plans and ERISA,” Page 13. Accessed July 7, 2020.
- IRS. “Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRA.” Accessed July 7, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."