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The purpose of retirement plans such as the 401(k) and Individual Retirement Account (IRA) is to save money for your retirement years. As such, the IRS imposes a penalty of 10 percent for early withdrawals taken from qualified retirement plans before age 59 1/2. Qualified retirement plans include section 401(k) plans, tax-sheltered annuity plans under section 403(b) for employees of public schools or tax-exempt organizations, and individual retirement accounts.
While you should always think carefully about taking money out of your retirement plan before you've reached retirement age, there may be times when you need access to those funds. Fortunately, IRS provisions allow a number of exceptions that may be used to avoid the tax penalty.
Remember that although using the above techniques will help you avoid the 10 percent penalty tax, you are still liable for any regular income tax that's owed on the funds that you've withdrawn. Distributions rolled over into another qualified retirement plan or distributions from a Roth IRA, however, escape both the regular income tax and the 10 percent penalty tax. Rollovers should be made directly between your brokers, to avoid paying the 20 percent withholding required on distributions that you touch.
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