Early Withdrawals

• If you withdraw money from your 401k prior to age 59 1/2, the administrator of the plan will send you a check for the amount in the fund, minus a mandatory 20 percent withholding for taxes due. In addition to that 20 percent withholding, you must pay a 10 percent penalty on the money you take out. The money you withdraw is also taxed as ordinary income, although the 20 percent mandatory withholding may satisfy much of that tax bill. Even so, the 10 percent penalty can significantly reduce the benefits of tapping your 401k money early.
  
  

401k Loan

• If you need to access the money in your 401k without paying a penalty, taking out a loan can be a good alternative to pulling the money out altogether. Many employers allow workers to borrow against the balance in their 401k accounts and then pay that money back to themselves through payroll deduction. This strategy only works if you are still employed, of course, but it is something to consider. Using the loan provision in your 401k plan could save you money on taxes while still giving you access to your money.
  
  

The 72t Provision

• If you are planning to retire early, you may be able to access the money in your 401k penalty-free by using the 72t provision. This provision uses a formula that includes your age, your life expectancy and the balance in the 401k. That formula determines how much you can take out each year, so the younger you are the less you will be able to withdraw. Once you start the withdrawals, you must continue them for at least five years or until you reach the age of 59 1/2, whichever is longer. You pay ordinary income taxes on the money you withdraw under the 72t provision but no tax penalty.
  
  

Hardship Withdrawals

• The IRS does allow hardship withdrawals from a 401k plan in some circumstances. Those circumstances can include the sudden death or illness of a family member, a long-term disability or damage to a principal residence. Even in cases where a hardship withdrawal is allowed, the person withdrawing the money still faces a 10 percent tax penalty. That means if you have a $100,000 401k, $10,000 of that money is gone to pay the penalty, plus more money used to pay the ordinary income taxes on that $100,000 withdrawal.