asYes, if you take a withdrawal from a 401(k), you will pay tax on this withdrawal. Under some circumstances, you may be able to waive the early withdrawal penalty (if you are under the age of 59 1/2). Still, the income will always be subject to tax (except for qualifying Roth 401(k) withdrawals).
Penalty-free withdrawals are often only for a specified dollar amount, and they are allowed for reasons that include the following:
- Your permanent disability.
- Medical expenses that exceed 7.5% of your gross income.
- To pay for health insurance if you lose your job.
- To satisfy an IRS levy.
Paying off a loan to your 401(k), however, is not one of the exceptions.
If you leave your current employer while you have a 401(k) loan balance and are unable to pay the loan in full, the remaining balance is a taxable distribution to you.
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