What is the tax implication for an early withdrawal of 401K funds?
We really ought to make this answer a “sticky” in both the Tax and Retirement forums, since this question gets asked in some form or another almost every day. Whenever you take a withdrawal from your 401(k) you pay both federal and state income taxes on the full amount of the withdrawal, with the exception of any portion of the withdrawal which is a return to you of your after-tax contributions. For most people the vast majority of their 401(k) is made up of pre-tax contributions, employer match, and investment growth – hence for most the full amount of the withdrawal is taxable. When you get your withdrawal the company will withhold 20%. Be aware that depending on the size of the withdrawal this may push you into a higher tax bracket than you are in currently, and so come next April you may have to pay an additional amount of tax based on your actual tax bracket. If you take a withdrawal and are under 59-1/2 years of age, in addition to income tax you will also have to pay an addition
