The current rules state that withdrawing before you are 59 and a half years old will incur a 401k cash out tax penalty of 10%. This does not include the other charges you get from regular income tax.
Cashing Out Early
The penalties that you pay include the Federal and State tax. But you will also have to cough up money for the penalties of withdrawing early. The penalty and tax are not the same. You have to pay for the four separately. It is this total that constitutes the tax payout you must make.
Take a married couple with no kids. They make $100,000 annually. One of them loses a job and their income becomes $75,000 yearly. Their tax bracket gives them an exemption of $3,650. Combined that would be $7,300. There is no 401k cash out tax in this area.
Assume that deductibles are average (i.e. no more than $114,000). Totaling the exemptions and deductions the amount will be $15,050. This amount has no Federal income tax linked to it.
But from this point on, payment is necessary. For $16,700 the rate is 10%. For the $51,200 mark the rate is set at 15%.
Assume the 401k has $100,000. By withdrawing early the tax brackets to pay will be the higher ones. Based on the example above that leaves about $7,950 (in a 15% tax bracket). Now we take $69,950. The tax bracket is at 25%.
This leaves almost $23,000. For $71,800 it will be taxed at 28%. Those assaying the 401k cash out tax would do well to remember this point.
So if you take $16,700 and multiply by 10 the result will be $1,670. For $51,200, multiply it by 15%. It is $7680. The total would be $9,350 for the income.
For the cashout, multiply $7,950 by 15% ($1,192). Take $69,150 and multiply by 25% ($17,287) and $22,900 by 28% ($6,412). The total is $24,891 for Federal taxes.
Next is the State income tax. Remember that these income taxes and deduction vary widely. In this example it is 7%. A good estimate would be $42,000 (income) and just over 7,000 for the withdrawal itself.
Now add in the penalty. The Federal rate for early 401k cash out tax is at 10%. States vary, but assume it is 3%. That would be $10,000 and $3,000 respectively.
Total Taxes to be Paid
In total, the Federal income tax will be $24,891. The State income tax will be $7,000. The Federal cash penalty will be $10,000 and State penalty around $3,000. Adding it up that would be $44,891. In other words, more than 40% of the $100,000 would be used to pay taxes and withdrawal penalties.
The figures outlined above are sample taxes. The charges are subject to change so you should always be updated. At the same time, be aware of your bracket.
Depending on your location and tax bracket, the 401k cash out tax might even be higher. For this reason you should think carefully before making an early withdrawal.