Determining 401k Penalties for Early Withdrawals

Early withdrawals from a 401k account are subject to penalties and taxes. The tax on any 401k withdrawal is equal to the current income tax level of the account holder. The only exception to this rule occurs when taxes have already been paid on the account due to the form of account; namely, a Roth 401k is not tax-deferred. In addition to a taxable amount for any 401k withdrawal, an early withdrawal will face a 10 percent penalty from the IRS.

Definition of Early Withdrawal

An early withdrawal from a 401k account is any amount taken out of the account before the account holder reaches the minimum age of 59 1/2. At this age, there is no mandatory withdrawal. The account holder has years to either leave money in the account or withdraw funds at his or her own discretion. However, prior to this age, any money that is taken out of the account is subject to a penalty. This includes money taken out during a rollover that does not occur, or occurs too slowly. You typically have 15 days to replace any funds taken out in order to avoid penalty.

Calculating the Early Withdrawal Penalty

The early withdrawal penalty is always 10 percent, regardless of your income level or the amount withdrawn. To determine your total expense, first calculate the amount you will owe on your income tax, and add 10 percent of the amount withdrawn to this figure. For example, if you withdraw $2,000 and fall in the 15 percent tax bracket, you will owe $500 to the IRS at the end of the tax year. You cannot avoid paying this penalty if you knowingly withdrew the funds prior to the qualified age.

Requesting Abatement of the Penalty

If you feel you do not owe the penalty because you did not knowingly withdraw funds, there are things you can do. For example, if you ordered your 401k manager to roll the account over to another form, the manager has a very narrow window to make this happen. The manager may experience delays in setting up the new account. If you feel these delays caused the penalty, and you do not feel you are responsible for the delays, you can file Form 843 to request an abatement or forgiveness of your penalty. You must provide reasons to show the IRS why you were not responsible for the withdrawal and should not be held accountable.

Avoiding an Early Withdrawal Penalty

To avoid an early withdrawal penalty, consider alternatives to taking money out of your 401k account in an emergency. Many lenders, and even some companies, will permit you to take a loan against your 401k in a time of need. The 401k sum is used as collateral, but it is only withdrawn if you cannot repay the loan on time. Loans for two specific items - a college education and a first home - may be taken from the 401k account without penalty. Speak with your administrator about these options.

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