For American taxpayers, qualified retirement plans are a valuable asset that may enable individuals to build wealth over decades while deferring their tax liability. If you take money out of an account like this, you reduce your principle and halt compounding and run the risk of incurring a significant tax obligation.

For the sake of this calculator, we will assume that retirement contributions were made using money that was contributed before taxes were taken out. These payments are normally subject to taxation at the saver's income tax rate, with an extra 10% penalty tax for those under 59 and a half years old. This often means that one-third or more of the entire withdrawal amount is devoted to making payments on income taxes.

Due to these high costs (and the fact that Americans and US corporations have severely underfunded their retirement plans), it is usually preferable to liquidate other assets or use short-term financing for temporary needs, quickly paying off any high-interest debts and not carrying a balance on credit cards from month to month. Carrying a balance on a credit card for a month or two is often lower than paying early withdrawal penalties from a retirement account.

Amount To Withdraw

The amount of money you want to take out of your qualified retirement plan now. Withdrawals are subject to income tax and may be subject to an extra 10% tax penalty if made before reaching age 59 and a half. The penalty does not apply to everyone. To learn more, speak with a tax professional. It is assumed that all 401(k) contributions were made on a tax-deferred or tax-free basis for this calculation. You might not have to pay taxes on the withdrawal if you made contributions that reduced your taxable income. You should speak with a tax or legal counsel for your specific case.

Current Age

Your current age.

Federal Income Tax Rate

The federal tax rate you anticipate paying. If you're uncertain, the calculator will choose 25% for you. Please be aware that state taxes are in a different entry box than federal taxes. To help you in figuring the federal tax rate that applies to your taxable income, see the chart under "Filing Status and Federal Income Tax Rates on Taxable Income."

State Income Tax Rate

You are now subject to the maximum state income tax rate on any new income you may get (or taxable distributions).

What Would Happen If I Take Early Retirement?

The federal government encourages people to save up money for their retirement. Because of this, there are tax incentives, such as Retirement Savings Contribution, and penalties for withdrawing retirement plans before retirement age.

The Internal Revenue Service (IRS) levies a penalty as an extra tax on most early retirement withdrawal plans. This is done to discourage individuals from utilizing their retirement assets for anything other than retirement income. Any money taken out of a qualified retirement plan before age 59 and a half is considered an early distribution or early withdrawal.

Starting a free tax return on eFile.com is the quickest and most accurate method to record an early withdrawal and determine whether you owe any taxes. We will generate the appropriate documents to record any withdrawals you make from your retirement plan based on your responses to several questions. Any of the following qualifies as a qualified retirement plan:

• A Traditional IRA or a Roth IRA
• An employee annuity plan, such as a 403(a)
• An employee plan, such as a 401(k)
• A 403(b) or similar plan for employees of public schools and tax-exempt organizations

Unless you fall into one of the exemption categories, the whole amount of any early withdrawal from a qualified retirement plan will be included as taxable income. The sum is not considered taxable if you do not meet one of the exclusions for making early withdrawals. The payout is subject to taxation at the same rate as your ordinary income. Early withdrawals are subject to a 10% penalty tax if you do not meet one of the exemption criteria.