If you take a 401(k) distribution in cash, you will increase your taxable income for that year by the gross amount. If you haven't reached the age of 59 ½ years at the time of the cash distribution, you may be assessed a premature withdrawal penalty of 10%, subject to certain exceptions.
What is the 401(k) early withdrawal penalty? If you withdraw money from your 401(k) before you're 59 ½, the IRS usually assesses a 10% tax as an early distribution penalty. That could mean giving the government $1,000, or 10% of a $10,000 withdrawal, in addition to paying ordinary income tax on that money.
If you withdraw funds early from a traditional 401(k), you will be charged a 10% penalty. You will also need to pay income tax on the amount you withdraw, since pretax dollars were used to fund the account. In short, if you withdraw retirement funds early, the money will be treated as income.
If you take a “lump-sum distribution” instead of rolling your 401(k) over to an IRA or a new employer's plan, you will have to pay income taxes on the money. You will also pay a 10% early withdrawal penalty if you're under age 59 ½.
Your 401(k) account isn't going to disappear once you quit a job; that money will always be there. But once you leave the job that set up the 401(k) account, you can't make any more deposits, per Vanguard.
If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. Your funds can usually remain in the account indefinitely.
The Bottom Line. If you leave your job, your 401(k) will stay where it is until you decide what you want to do with it. You have several choices including leaving it where it is, rolling it over to another retirement account, or cashing it out.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.
Under federal law, an employer can take back all or part of the matching money they put into an employee's account if the worker fails to stay on the job for the vesting period.
An early withdrawal from a 401(k) plan typically counts as taxable income. You'll also have to pay a 10% penalty on the amount withdrawn if you're under the age of 59½.
Hardship distribution for a reason not allowed by the plan
For example, if the plan states hardship distributions can only be made to pay tuition, then the plan can't permit a hardship distribution for any other reason, such as a home purchase.
In some cases, you might be able to withdraw funds from a 401(k) to pay off debt without incurring extra fees. This is true if you qualify as having an “immediate and heavy financial need,” and meet IRS criteria. In those circumstances, you could take a hardship withdrawal.
The SECURE 2.0 Act of 2022 also made changes to 401(k) plans and individual retirement accounts (IRAs) that you want to be aware of: Starting in 2024, you may be able to withdraw up to $1,000 per year from retirement plans for certain emergencies without paying the 10% penalty.
One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed. Some methods allow you to save on taxes but also require you to take out more from your 401(k) than you actually need.
Withdrawals from 401(k)s are considered income and are generally subject to income tax because contributions and growth were tax-deferred, rather than tax-free.
When you take a qualified distribution from a 401(k) after the age of 59 1/2, you are taxed at your ordinary income tax rate unless you have a Roth 401(k), which is funded post-tax but allows for tax-free withdrawals.
You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship.
401(k) withdrawals
Pros: You're not required to pay back withdrawals and 401(k) assets. Cons: Hardship withdrawals from 401(k) accounts are generally taxed as ordinary income. Also, a 10% early withdrawal penalty applies on withdrawals before age 59½, unless you meet one of the IRS exceptions.
Acceptable Documentation
Lost Employment. • Unemployment Compensation Statement. (Note: this satisfies the proof of income requirement as well.) • Termination/Furlough letter from Employer. • Pay stub from previous employer with.
A hardship withdrawal is when you take money early from your 401(k) account in response to an immediate, urgent financial need. While early withdrawals (those made before you reach the age of 59.5) normally come with a 10% penalty, this penalty does not apply to hardship withdrawals.
The short answer: It depends. If debt causes daily stress, you may consider drastic debt payoff plans. Knowing that early withdrawal from your 401(k) could cost you in extra taxes and fees, it's important to assess your financial situation and run some calculations first.
Contact your former human resources departments one by one and get the name of the company that manages their 401(k) plans. "Ask if there is a contract number or plan ID number that you can give them," Burk says. "Then you can call those retirement companies, and they will help you track them down."
First, you will not go to jail for taking out hardship withdrawal and use it for something else it was intended for. IRS has different ways to penalize you for taking it. IRS has very strict rules that apply to hardship distributions. And one of the rules is that once you take it out, there's no way to return it.