Originally Posted by mhgaffney
I just heard from a friend who cashed in his 401 and had to pay a new 40% tax -- which is much higher than his usual payroll tax.
The actual penalty for early withdrawl is 10% on top of your marginal tax rate. In other words, depending on your tax bracket the tax you pay for early withdrawl is between 20% (you you have no very little income) and 49.6% (for the highest incomes).
Unless you just started your 401k or the market has done very badly, you're still likely come out ahead from having not invested pre-tax income.
The penalty is not 40%.