Understanding Withdrawal Implications - 401K Participants
Outlined below are the basics of a 401K withdrawal including both the IRS tax implications along with the concerns around opportunity cost. This information is presented for reference and general knowledge only. Please consult with a tax and or legal professional before conducting a withdrawal from a defined contribution plan.
A basic withdrawal from the 401K is the most basic way to access the funds. This is essentially converting the entire or a portion of financial account into liquid cash. This action however comes at a penalty. Should money be withdrawn from the account prior to retirement age (59.5) there will be an early withdrawal penalty of 10%. Additionally if the money contributed to the account was done so before taxes were applied, the withdrawal amount will be taxed at the current account holder's tax rate.
For example if the withdrawal amount is $10,000 and the current holder is in the second taxable bracket ($37,001 - $80,000 annual taxable income) - then the total penalty could be as high as $3,190 ($10,000 x (10% + 21.9%)
While a quick and easy way to access the funds, most financial experts would advise not to simply withdrawal money from the account unless the holder was at the age of 59.5. However in the case of emergency or a major tax offset (such as starting a business) it may make sense.