Your 401(k) is called a retirement account because the government doesn't want you tapping it until you're at least 59 1/2. Any time you make a withdrawal, you pay tax on what you take out of the account, but if you take money out early, your tax payment gets even higher.
First, figure out what the regular income tax on your withdrawal will be. Calculate how much you have or will take out this year, add that to your regular income and estimate your total tax. If the money you take out keeps you in the same tax bracket, you can use your current tax rate. If you withdraw a substantial amount, some of it may fall into a higher tax bracket. If you live in a state that charges its own income tax, follow the same steps for your state tax bill.
The IRS lets you tap your 401(k) early for "hardship withdrawals" -- money you need to pay for medical bills, a home or college expenses -- although not all plans allow this. If you make an early withdrawal, add a 10 percent tax penalty to the regular income tax you're paying. If you take out $10,000, for instance, $1,000 goes to the IRS no matter what tax bracket you're in. There are exceptions: There's no penalty for early withdrawals due to permanent disability, or because you have to give some of the account to a divorcing spouse.
Assume you're a single taxpayer and your 2012 taxable income is $30,000. You withdraw $10,000 from your 401(k) to pay tuition for college, bringing your total income to $40,000. For single filers, the jump from the 15 percent to the 25 percent tax bracket takes place at $35,350 so you pay 15 percent on the first $5,350 of your withdrawal -- $802.50. The remaining $4,650 of the withdrawal gets taxed at 25 percent -- $1,162.50. Your income tax on the withdrawal is $1,965, and you must add a $1,000 penalty.
Even if you're not making a hardship withdrawal, there are times you can duck the 10 percent penalty. Should you leave your job after age 55, you can start withdrawing money from your 401(k) immediately without a penalty. If you don't want to wait that long, the IRS will let you empty your account over five years, penalty-free if you make "substantial equal periodic payments." Figuring how much you should take out to keep payments equal is tricky -- and if you screw up, you must pay the 10 percent penalty.