Prepare to Pay a Penalty to Get Out of a 401(k) Early
In 2010 alone, Americans paid $5.8 Billion in penalties for early withdrawals from qualified plans according to IRS numbers
Qualified Plans (like 401(k)s and IRAs) were designed to facilitate saving for later or post-working years. One of the key benefits is the deferral of taxes. That’s the carrot. The stick is a penalty structure that is particularly punitive if an individual wants to take their money (yes it’s their money…they earned it…who else’s could it possibly be?) out prior to age 59½.
While there are a few limited exceptions, for the most part there is a 10% penalty on any money withdrawn prior to 59½. You also are responsible for all of the regular taxes due on the amount of the withdrawal, which could very well jump you into a higher tax bracket. Additionally there is a 20% mandatory withholding on withdrawals so regardless of how much your actual tax liability is you can only access 80 cents on the dollar.
In 2010 alone, Americans paid $5.8 Billion in penalties for early withdrawals from qualified plans according to the IRS. This is in addition to the regular taxes owed on these withdrawals.
So you want to retire before you are 59 ½? Or you want to help put your children through college or start a business or maybe you lose your job and need the money just to eat? If your money is sitting in a 401(k), tough luck…you should have been better prepared…. (unless you want to pay the 10% penalty).
 Penalty Free 401(k), IRA Withdrawals, http://www.bankrate.com/finance/retirement/penalty-free-401-k-ira-withdrawals-1.aspx
 Here’s a simple calculator from Wells Fargo. Remember to use the new tax bracket the additional income would put you in https://www.wellsfargo.com/investing/retirement/tools/401k-early-withdrawal-calculator/
 Forbes, 1/15/2013 http://www.forbes.com/sites/janetnovack/2013/01/15/11-ways-to-tap-retirement-cash-early-without-a-10-penalty
 Different types of plans have different provisions for penalty free withdrawals. 401(k)s generally speaking have more restrictions than IRAs.