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Early withdrawals from a 401(k) plan are typically subject to income taxation as well as a 10% penalty. When an individual withdraws funds from their 401(k) before reaching the age of 59½, the IRS treats it as an early distribution. This means that the amount withdrawn is added to the individual's taxable income for that year, leading to potential income tax liabilities. Additionally, a 10% early withdrawal penalty is imposed on the amount withdrawn, which is designed to discourage individuals from using retirement savings for non-retirement expenses prematurely.

This structure aims to protect individuals' retirement savings and encourage long-term planning and stability in their financial future. There are some exceptions where early withdrawals may avoid the penalty, such as in cases of disability, medical expenses, or other specific circumstances, but standard early withdrawals incur both taxes and penalties. Thus, recognizing both components of the taxation—ordinary income tax and the penalty—is essential for understanding the consequences of early distributions from a 401(k) plan.