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The 401(k) Early Withdrawal Penalty: It's Not Fair!

Contributor Natalie Choate reviews some of the inconsistencies in the penalty investors pay if they take distributions from their retirement plans too early.

If you are looking for arbitrary and capricious tax results look no further than the 10% "additional tax" on pre-age-59 1/2 distributions from retirement plans. Here are three examples of the maddening inconsistencies that plague this "section 72(t) penalty."

Roll Tuition Payments Through an IRA
Jim and Joe are both age 35, both have been working several years at BigCo, both have money in the BigCo 401(k) plan, and both have just quit their jobs to return to school and earn graduate degrees. Each faces a $16,000 tuition bill and needs to tap his 401(k) plan money to pay it.