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Based on 401 (k) withdrawal rules, if you withdraw money from a traditional 401 (k) before age 59½, you will face — in addition to the standard taxes — a 10% early withdrawal penalty. Why?
Cashing out your 401 (k) early typically comes with a 10% penalty tax, plus the cash would be subject to income tax if it hasn't already been paid. For example, if you have $10,000 in the account ...
“The IRS charges a 10% penalty tax for early 401 (k) withdrawals. That’s on top of the taxes you pay for making any 401 (k) withdrawal,” said Todd Stearn of The Money Manua l.
Making an early withdrawal from your 401 (k) might sound like a tempting idea — after all, it is your money. But once you know the ramifications, you may feel differently.
The benefit of the Roth account is from tax-free capital gains. The net benefit of the traditional account is the sum of (1) a possible bonus (or penalty) from withdrawals at tax rates lower (or higher) than at contribution, and (2) the impact on qualification for other income-tested programs from contributions and withdrawals reducing and adding to taxable income, minus the consequences of ...
This tax advantage, however, changes once an account holder starts receiving distributions from the 401 (k). As you pull money out, you’ll owe income taxes on the funds.
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