What Is The Penalty For Cashing Out A 401K Early? 
Company sponsored retirement program can have provisions that allow participants to withdraw funds from their active program . The criteria for who can exercise these options are detailed in the plan documents which are normally available from the company headquarters . Some plans allow withdrawals to assist in the purchase of a home , to pay for education , or emergencies . The withdrawal provision will often require that the amount withdrawn be repaid and might stipulate a specific time frame for the repayment . The Internal Revenue Service looks at these withdrawals as distributions and taxes them accordingly . If the retirement fund is entirely money contributed by the employer , the distribution would be treated as ordinary income and if the employee is less than 59.5 years old an additional 10 % penalty tax is also applied . The same general taxation is applied if the employee contributes to the pension plan but the contribution has not been taxed as income . This is a salary reduction agreement . This is the most common form of pension plan today . If the employee has made after-tax contributions to the pension plan those are treated differently and some or part of the withdrawal might be seen as a return of principle . The determination of tax is done by the employers accounting firm . They will notify the employee if any tax is due . The employee must report this to the IRS which will determine if the penalty tax applies . There are exceptions to the early distributions penalty tax . If the qualified plan had an auto-enrollment feature and the employee decides to not participate in the plan , that withdrawal is an exception to the early withdrawal tax . If the amount placed in the plan exceeds the annual allowance under the Internal Revenue Code , money can be withdrawn without penalty to bring the plan into conformity . These withdrawals must be made in a timely manner . When the participant dies , or becomes totally and permanently disabled , the money from the retirement fund can be distributed without incurring the early withdrawal tax . If the money is being withdrawn from the retirement fund to satisfy a qualified domestic relation order the distribution will not be subject to the early withdrawal tax . This occurs frequently in divorce proceedings . If the employee withdraws substantially equal payments over a period of time those distributions would not be subject to the early withdrawal tax . This can be quite tricky and legal and accounting advice should be sought . There isnt an early withdrawal tax on the amount withdrawn if the Internal Revenue Service has put a levy on the pension plan . If money is withdrawn to pay medical expenses that exceed 10 % of the Annual Adjusted Gross income of the employee , those distributions are not subject to the early withdrawal tax . If withdrawals from a pension plan are being done by a qualified military reservist who has been activated , those distributions will be exempt from the early withdrawal tax If the withdrawal is from the current plan to another , particularly if it is being done from one trustee to another there will not be an early withdrawal tax . If the employ has reached age 55 and is separating from service with the company , the distribution will not trigger the early withdrawal tax . To determine how this tax will affect you contact your plan administrator , accountant or attorney . 