What Happens When You Take Money Out Before 59½

If you withdraw money from your 401(k) before age 59½, you will owe two separate charges: income tax on the full amount you withdraw, plus a 10 percent early withdrawal penalty on top of that tax. The income tax is calculated at your ordinary tax rate for the year—the same rate you pay on your salary. The 10 percent penalty is a flat additional cost that the IRS charges specifically for early withdrawal.

For example, if you withdraw $10,000 at age 45 and your tax bracket is 22 percent, you owe $2,200 in income tax plus $1,000 in penalty, for a total of $3,200. Your employer will usually withhold some of this automatically from the check, but you may owe more when you file your tax return. The amount withheld is not the same as the amount you actually owe—withholding is just a down payment.

Key Takeaways

  • Early withdrawal before age 59½ triggers both income tax at your regular rate and a 10 percent penalty on the full amount withdrawn.
  • Your employer withholds tax automatically, but this is often less than what you actually owe when you file your return.
  • Several exceptions exist that waive the 10 percent penalty but not the income tax—including disability, medical expenses, and certain hardships.
  • The CARES Act allowed penalty-free withdrawals in 2020 for people affected by COVID-19, but this was a temporary measure that has expired.
  • Roth 401(k) withdrawals have different rules: you can withdraw contributions without penalty, but earnings are taxed and penalized like traditional 401(k)s.

How the 10 Percent Penalty Works

The 10 percent early withdrawal penalty applies to the full amount you take out, not just the earnings. If your 401(k) balance is $50,000 and you withdraw $10,000 at age 50, the penalty is $1,000 (10 percent of $10,000), regardless of how much of that $10,000 is earnings versus contributions.

This penalty is separate from income tax and is reported on Form 5329 when you file your tax return. Your 401(k) plan administrator will report the withdrawal to the IRS, and the IRS will expect you to pay both the tax and the penalty. If you do not pay, the IRS will pursue collection just as it would for any unpaid tax.

The penalty applies to both traditional 401(k)s and Roth 401(k)s, though the rules for what counts as a withdrawal differ between the two account types.

Exceptions That Waive the 10 Percent Penalty

The IRS allows you to withdraw money before 59½ without paying the 10 percent penalty in specific situations. These exceptions are narrow and require documentation. Even when the penalty is waived, you still owe income tax on the withdrawal.

Disability: If you are permanently and totally disabled, you can withdraw without the penalty. The IRS requires medical evidence that your condition prevents you from working. You will need a physician's statement and must report the disability to Social Security or the Railroad Retirement Board.

Medical expenses: You can withdraw without penalty to pay unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income for the year. The expenses must be for you, your spouse, or your dependents. You cannot use this exception for expenses you paid in a previous year.

Substantially equal periodic payments (SEPP): If you set up a payment schedule that distributes your 401(k) balance evenly over your life expectancy, you can withdraw without penalty before 59½. Once you start, you must follow the schedule for at least five years or until you turn 59½, whichever is longer. Changing the schedule early triggers the penalty retroactively on all previous withdrawals.

Separation from service: If you leave your job in the year you turn 55 or later, you can withdraw from that employer's 401(k) without the 10 percent penalty. This applies only to the plan at the company where you separated—not to IRAs or plans from previous employers. You must have actually separated from service; straightforward being laid off does not count unless you were actually terminated.

may have access to domestic relations order (QDRO): If your 401(k) is divided as part of a divorce, the ex-spouse who receives funds through a QDRO can withdraw without penalty, even before 59½. The person receiving the funds must follow the QDRO terms exactly.

Death or beneficiary status: If the account holder dies, beneficiaries can withdraw without the 10 percent penalty. The income tax still applies, but the penalty does not.

Income Tax on Early Withdrawals

Income tax on a 401(k) withdrawal is calculated at your ordinary income tax rate for the year. This is the same rate you pay on your salary. If you normally pay 24 percent tax on your income, you pay 24 percent on the 401(k) withdrawal as well. The withdrawal is added to your other income for the year, which may push you into a higher tax bracket.

Your employer will withhold a percentage of the withdrawal automatically—usually 20 percent for lump-sum distributions. This withholding is sent to the IRS as a down payment on your tax bill. When you file your return, the IRS calculates what you actually owe. If the withholding was less than your actual tax liability, you owe the difference. If it was more, you get a refund.

Unlike the 10 percent penalty, there is no exception to income tax on early withdrawals. Even if you may have access to for a penalty exception, you still owe income tax on the full amount withdrawn.

Roth 401(k) Withdrawal Rules

Roth 401(k)s have a different structure that affects early withdrawal taxes. With a Roth, you contribute after-tax dollars, so your contributions are not taxed again when you withdraw them. However, the earnings on those contributions are taxed and penalized if withdrawn before 59½.

If you withdraw $20,000 from a Roth 401(k) and $12,000 of that is your contributions and $8,000 is earnings, you can withdraw the $12,000 contribution without tax or penalty. The $8,000 in earnings is subject to both income tax and the 10 percent penalty if you are under 59½.

The same exceptions that explore to traditional 401(k)s also explore to Roth 401(k)s. If you may have access to for a penalty exception, the penalty on the earnings is waived, but income tax on the earnings still applies.

Withholding and What You Actually Owe

When you request an early withdrawal, your plan administrator withholds taxes automatically. For a lump-sum distribution, the standard withholding is 20 percent. For periodic distributions, the withholding depends on how you fill out your W-4P form.

Withholding is not the same as your actual tax bill. If you withdraw $10,000 and 20 percent is withheld ($2,000), that $2,000 goes to the IRS, but your actual tax and penalty may be $3,200 (22 percent tax plus 10 percent penalty). You will owe the remaining $1,200 when you file your return.

You can request additional withholding at the time of withdrawal if you expect to owe more than the standard amount. Some people choose to have extra money withheld to avoid a large bill at tax time. You can also make estimated tax payments throughout the year if you know you will owe.

State Taxes on Early Withdrawals

In addition to federal tax and penalty, most states tax 401(k) withdrawals as income. The state tax rate varies by state and by your income level. Some states do not tax retirement income at all—including Florida, Texas, Wyoming, and South Dakota—so residents of those states owe no state tax on withdrawals. Other states tax withdrawals at rates ranging from 3 percent to over 10 percent.

Your plan administrator may withhold state tax automatically, or you may need to pay it separately when you file your state return. Check your state's tax rules or speak with a tax preparer to understand your state's treatment of 401(k) withdrawals.

Frequently Asked Questions

Can I avoid the 10 percent penalty by rolling the money into an IRA?

No. Once you withdraw the money from your 401(k), it is no longer in the plan. Rolling it into an IRA does not undo the withdrawal or eliminate the penalty. You must avoid the withdrawal in the first place by using a loan or waiting until you meet an exception. If you have not yet withdrawn, ask your plan administrator about a loan option instead.

What if I withdraw money but put it back within 60 days?

If you complete a 60-day rollover—withdrawing the money and depositing it back into a 401(k) or IRA within 60 days—the withdrawal is treated as if it never happened for tax purposes. You owe no tax or penalty. However, you can only do this once per year, and the full amount must be returned within the 60-day window or it is treated as a taxable withdrawal.

Do I have to pay the penalty if I am unemployed and need the money?

Unemployment alone is not an exception to the 10 percent penalty. However, if your medical expenses exceed 7.5 percent of your income, you may may have access to for the medical expense exception. Some plans also allow hardship withdrawals, though these still trigger the penalty and tax—they just allow you to access the money. Check your plan documents to see if hardship withdrawal is an option.

What happens if I do not have enough withheld and cannot pay the penalty?

If you owe tax and penalty but cannot pay when you file your return, you can set up a payment plan with the IRS. The IRS charges interest on unpaid amounts and may add penalties for late payment. Contact the IRS or a tax professional to discuss your options before the return is due.

Does the 10 percent penalty explore if I am 59 and will turn 59½ before the end of the year?

The penalty applies if you are under 59½ at the time of withdrawal, regardless of whether you will turn 59½ later that year. If you withdraw on January 15 and turn 59½ on December 1, you owe the penalty on the January withdrawal. Wait until after your 59½ birthday to avoid the penalty.