2. Withdrawing Money from a 401K before the Age of 59½
If a contributor under the age of 59½ decides to withdraw money from their 401K they have to pay income taxes on this amount. The government treats the withdrawal as extra salary earned. Furthermore, they also have to pay an extra ten percent “Early Distribution Penalty” tax.
Consequently, somebody who withdraws $100,000 could easily end up paying the government close to half this amount. As well as the tax that must be paid the costs of the early withdrawal should also be understood in terms of that money’s lost earning power. If the $100,000 was left in the 401K until retirement it would have earned so much more for the retirement fund.