Why do the give you a penalty tax for withdrawing your 401K early?

Question

They took 33% of my 401K. Is this the standard tax? Also I noticed there were no state tax withheld which means I'll owe at the end of the year.

Trust me I wouldn't have done it if I didn't need to.

Answer 1

Dear... It's to try and encourage you to save more and leave your money in the account... Bob above seems like a real goober in the way he's explaining it to you.... They aren't essentially giving you a break on anything...Your going to have to pay tax on that money one day one way or another...There's no way around that... The thing is.. Your money that you would have had to give them in taxes had they taken it out right away is accumulating compounding interest... So it's a slight benefit..... Not enough of one for them to Justify the rate they hit you with if you take it out early.... Hope that helped.....God bless you !

Answer 2

You get penalized because that is the way the law is written.

Answer 3

They penalize you ecause they have been giving you tax breaks on your 401-K since you got it with the understanding that you would not touch it until you were 59.5 years old.  You broke that agreement so you pay the penalty.

You are right about the state.  And if you owe enough for the entire year, you will also owe an underpayment penalty.  To avoid that you could pay your state an estimated payments.  Go to your state's web site and look for "Estimated Payments", download the form they send you to, and send in a percentage of the 401K distribution based on your state.  If you don't know, use 5% - that will be close enough to almost certainly prevent a penalty.

Answer 4

The actual tax won't be determined until you file your tax return.  The withdrawal will be a part of your income, so you will pay income tax on it at your marginal tax rate(s).  At this point, you are even (so to speak)...because you have never been charged income tax on that money.

Then, 10% of the amount of the withdrawal is tacked on top.  That is your penalty for early withdrawal.

Answer 5

You pay a 10% penalty plus income tax on the gross withdrawal.  You undoubtedly got paperwork acknowledging this when you established the 401(k) account.