Question 1

How much tax and penalty do I pay if I cash out my 401(k) early?

Accepted Answer

If you withdraw money from a traditional 401(k) before age 59½ without an IRS exception, you owe a 10% early withdrawal penalty plus ordinary Federal and State income taxes. Plan administrators also withhold 20% upfront for federal taxes.

Question 2

What is the IRS Rule of 55 for 401(k) withdrawals?

Accepted Answer

Under the IRS Rule of 55, if you leave your job in or after the calendar year you turn age 55, you can take distributions from that current employer's 401(k) plan without paying the 10% early withdrawal penalty, though ordinary income taxes still apply.

Question 3

Which states do not tax 401(k) retirement distributions?

Accepted Answer

States with no state income tax (such as Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska, and Tennessee) plus retirement-exempt states like Pennsylvania, Illinois, Mississippi, and Iowa do not tax qualified 401(k) retirement distributions.

New Mexico (NM) 401(k) Early Withdrawal & Cash-Out Calculator