How are 401(k) plan distributions and hardship withdrawals taxed?

Author: Ryan F. Donovan

Early distributions from a 401(k) plan (i.e., those made before an employee is 59 years and six months old) are subject to normal income taxes and an extra penalty of 10 percent for early withdrawal. The normal income tax rate for distributions is usually 20 percent. If financial hardship exists, it is possible to get the extra 10 percent penalty waived, but normal income taxes and wage reporting will still be required, per § 401(k) guidelines. Note that the eventual net income tax impact to the employee will be based on the tax bracket the employee inhabits. For that reason, the tax impact to the employee can vary greatly, but the withholding requirements upon the distribution do not take this into account.