Penalty

• The first thing that you have to deal with when taking money out of your 401(k) before you retire is a penalty. This early distribution penalty is equal to 10 percent of the total value of your distribution. The 10-percent penalty is something that you have to pay on your own when you file your taxes for the year. The penalty is based on the amount of your distribution and not only the account balance.
  
  

Taxes

• Another issue of taking money out of your 401(k) is that you will have to pay taxes on the amount. The amount of money that you take out will be counted as if it were regular income. This means that you pay taxes on the amount based on your marginal tax rate. When you take a distribution from your 401(k), the provider will hold out 20 percent for tax withholding.
  
  

Tax Brackets

• When you take money out of your 401(k), you also have to think about your tax bracket situation. Since the money that you take out of your 401(k) will count as regular income, this amount will be added to your normal income to determine in which tax bracket you fall. If you are on the borderline of one bracket, this distribution could put you up into the higher bracket and all of your taxes will cost more.
  
  

Retirement Impact

• Besides the formal taxes and penalties that will be imposed, you also have the penalty of negatively affecting your retirement chances. When you have a 401(k) account at your disposal, you have the ability to set aside a large amount of money for your retirement and invest it on a pre-tax basis. Once you use that money, you could potentially set yourself back many years. You may not be able to retire on time according to your goals.
  
  

Considerations

• Getting access to your 401(k) money is generally not very easy. One of the most common ways that people access their 401(k) is when they leave their job. Another way to access the money is through a 401(k) hardship withdrawal. Some plans allow these withdrawals if you have some type of financial hardship. You still have to pay the penalties with this type of withdrawal. You could also access the money through a 401(k) loan and avoid the penalties and taxes.