3. The taxes and penalties on early withdrawals are outrageous. The taxation of withdrawals from retirement plans, such as a 401(k), can be quite tricky.
Our income-tax system is progressive, meaning the higher one's income, the higher the percentage of our income will go to taxes. The federal tax rates go from zero to 39.6 percent.
Plus, most states have income tax, as well. All withdrawals from retirement accounts are added on to our other income, which could push you into a higher tax bracket.
A $10,000 withdrawal could easily cost more than $3,000 in federal and state taxes. But that's not all. Unless you are age 59½, or retired and older than age 55, you'll be hit with a 10 percent federal early withdrawal penalty when you pull the funds from your 401(k). Plus, some states tack on their own early withdrawal penalty, as California does with its 2.5 percent hit.