• 401k accounts help people save money for retirement.money image by Horticulture from Fotolia.com
  
  To help their employees save for retirement in a tax-advantaged account, many employers offer their employees the opportunity to contribute to a 401(k) retirement plan as part of their compensation package. 401(k) accounts can be either traditional plans, which allow tax-deductible contributions but tax the money when it is taken out at retirement, or Roth plans, which have contributions made with after-tax dollars but allow the money to be withdrawn tax-free at retirement. However, if you take out money before retirement, you will have to pay a tax penalty. You may also face tax penalties if you fail to take required minimum distributions.
  
  

Early Withdrawal Tax Penalties

• According to the IRS, you qualify as retired when you reach age 59 1/2 or leave your job after turning 55. If you take out money before retirement, you will have to pay a 10 percent penalty on the taxable portion of the withdrawal, assuming you are able to take a withdrawal. Even though the IRS permits hardship distributions from 401(k) plans, not all 401(k) plans allow them. If your plan does not allow a hardship distribution, or you do not qualify, you cannot withdraw your money from the plan.
  
  

Roth 401(k)s

• If you have a Roth 401(k), calculating your tax penalty for an early withdrawal is slightly different. The IRS allows the contributions made with after-tax dollars to come out tax free, which means you do not have to pay a tax penalty on those withdrawals. However, earnings taken out from your Roth 401(k) are tax and are therefore subject to the 10 percent tax penalty. The IRS requires that your withdrawal contain portions of contributions and earnings proportional to the amounts of contributions and earnings in the account. For example, if your 401(k) account contained 35 percent contributions and 65 percent earnings, you would have to pay the 10 percent tax penalty on 65 percent of your withdrawal.
  
  

Required Minimum Distributions

• When you turn 70 1/2, you must start taking required minimum distributions from your account. If you fail to withdraw the amount required, you must pay a penalty equal to 50 percent of the amount not withdrawn. The amount that you must withdraw depends on the value of your account and the life expectancy tables created by the IRS. The IRS publishes three different tables. Most people use the third table unless their spouse is at least 10 years younger than them, in which case the second table is used. The table gives the number of years the 401(k) is expected to be distributed over. Therefore, to find your minimum required distribution, divide the value of your 401(k) plan by the number of years the IRS expects it to be distributed over.