What is the penalty for cashing out a 401(k) or IRA early?

Withdrawing from a 401(k) or traditional IRA before age 59.5 triggers a 10% early withdrawal penalty on top of regular income tax on the distribution. For example, if you withdraw $50,000, you'll owe income tax at your marginal rate (potentially 22-32% for most filers) plus a $5,000 penalty, meaning you could lose 32-42% of the withdrawal to taxes and penalties. Exceptions to the 10% penalty include: disability, death (distributions to beneficiaries), medical expenses exceeding 7.5% of AGI, health insurance premiums while unemployed, higher education expenses (IRA only), first-time home purchase up to $10,000 (IRA only), substantially equal periodic payments (Rule 72(t)), IRS levy on the account, qualified birth or adoption distribution (up to $5,000), and certain natural disaster distributions. Roth IRA contributions (not earnings) can be withdrawn at any time without penalty. If you need funds and are considering a 401(k) withdrawal, explore a 401(k) loan first, as it avoids both taxes and penalties as long as you repay it.