401k Plans

• A 401k plan is a retirement plan arranged by a company for the benefit of its employees. Generally, employees have regular amounts transferred from their paycheck to their 401k plans and the employer matches the contribution with a certain percentage and invests it in reliable stocks and bonds. Employee contributions to 401k plans are usually tax-deferred. This means that their contributions are taken out of their pay before any federal income taxes are assessed.
  
  

Early Withdrawal of 401k Funds

• Most 401k plans have either a required age that a taxpayer must reach or a number of years that they must invest before they can withdraw the funds as a regular pension payment. Many plans classify an early withdrawal as one taken before an employee reaches the age of 59 1/2.
  
  

Federal Income Tax Consequences

• Residents of Texas may have to pay federal income tax on their early withdrawal funds, depending on the amount they cash in. However, most employees who withdraw 401k funds early are subject to a 10 percent penalty in addition to the federal income tax they owe. Some special circumstances may qualify plan participants for a hardship withdrawal. In these cases, employees have to pay income tax on their distributions but they may be exempt from the additional penalty.
  
  

Texas State Penalties

• The state of Texas does not impose a state income tax on its residents. Residents of Texas are not required to report unearned or earned income, regardless of the amount they receive. Individuals who live in Texas and pay federal income taxes and penalties on 401k distributions do not have to pay any state taxes or penalties on these funds.