Tax year 2026Checked October 28, 2026

Cashing out a 401(k) or IRA early on H-1B or OPT: the tax, the 10% penalty and the exceptions

What an early withdrawal costs, the IRS exceptions for plans and IRAs, how much is withheld for residents and nonresidents, a $20,000 example, hardship withdrawals, loans, Roth money and rollovers.

10% additional tax on the taxable part of a 401(k) or IRA payout taken before age 59½, unless an IRS exception applies

By F1TaxReturn Tax Team. Published October 28, 2026. Facts checked against the sources below on October 28, 2026. 10 minute read.

In short

Taking money out of a traditional 401(k) or IRA before age 59½ costs income tax on the taxable part plus a 10% additional tax, unless an IRS exception applies.
A 401(k) cash-out you could roll over has 20% withheld for a resident alien, and an IRA payout 10% by default (Form W-4R); a payout to a nonresident alien generally has 30% withheld, or a lower treaty rate.
On a $20,000 401(k) cash-out in 2026, a single H-1B worker aged 30 who is a resident alien earning $70,000 owes an estimated $6,400 of federal tax, $2,400 more than the $4,000 withheld.
Leaving a job in or after the year you turn 55 is an exception only for plans such as a 401(k); higher education and a first home (up to $10,000) are exceptions only for IRAs.
A direct rollover to a traditional IRA or another plan has no withholding and generally no tax until you take the money out; most payouts made to you can still be rolled over within 60 days.

Contents, 11 sections

If you take money out of a traditional 401(k) or IRA before age 59½ in 2026, you owe income tax on the taxable part. You also owe a 10% additional tax on it, unless an IRS exception applies.

An H-1B worker who is a resident alien follows the same rules as a US citizen. A nonresident alien, such as an F-1 student on OPT in their first five calendar years, has tax withheld under other rules. They generally report the payout on Form 1040-NR.

For contributions, see the 401(k) guide for OPT and H-1B workers and the IRA and Roth IRA guide. For the rest of your return, see the guide to US taxes for international students.

What does an early 401(k) or IRA withdrawal cost?

An early withdrawal costs income tax on the taxable part at your own rate, plus a 10% additional tax on it. Before age 59½, "individuals must pay an additional 10% early withdrawal tax unless an exception applies" (IRS).

The 10% reaches only the taxable part, so it skips after-tax money you paid in, such as Roth contributions, and any amount you roll over (Publication 575 (2025)).

The 10% goes on Schedule 2 (Form 1040): line 5 on the 2026 draft, line 8 in 2025.

If box 7a (box 7 before 2026) of all your Forms 1099-R correctly shows code 1 and no exception applies, you skip Form 5329. You enter 10% of the taxable amount on that line and check its box (2025 Form 1040 instructions). Otherwise you file Form 5329 (Form 5329 instructions (2025)).

Key facts

Additional tax before age 59½: 10% of the taxable part (25% from a SIMPLE IRA in your first 2 years in the plan), unless an exception applies
Withholding on a 401(k) payout to a resident alien: 20% of the taxable part of a payout you could roll over; you cannot choose less
Withholding on an IRA payout to a resident alien: 10% by default; 0% to 100% by choice on Form W-4R (generally not under 10% if delivered outside the US)
Withholding on a payout to a nonresident alien: Generally 30% of the US-source amount, or a lower treaty rate; reported on Form 1042-S, income code 15
Rolling over an eligible payout paid to you: Within 60 days of the day you receive it
Where the 10% goes on a 2026 return: Schedule 2 (Form 1040), line 5 on the 2026 draft (line 8 in 2025), with Form 5329 when required

For: H-1B workers and former OPT workers who change jobs, are laid off or leave the US and want money from a 401(k) or IRA before age 59½ in 2026, and F-1 students with a small plan from an internship.
Not for: Advice on whether to withdraw or how to invest; worked figures for a nonresident alien or a tax treaty; how India or any other country taxes the payout; any plan's or provider's rules for visa holders.

Which exceptions avoid the 10% additional tax?

The exceptions differ between workplace plans, such as a 401(k), and IRAs. Leaving a job in or after the year you turn 55 is an exception only for plans; higher education and a first home are exceptions only for IRAs.

Selected rows of the IRS chart of exceptions (IRS, updated December 11, 2025). The 401(k) column covers other qualified plans too.
Exception	401(k)	IRA
Separation from service during or after the year the employee reaches age 55	Yes	No
Qualified higher education expenses	No	Yes
Qualified first-time homebuyers, up to $10,000	No	Yes
Unreimbursed medical expenses (more than 7.5% of AGI)	Yes	Yes
Health insurance premiums paid while unemployed	No	Yes
Up to $5,000 per child for qualified birth or adoption expenses	Yes	Yes
One distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or vested account balance over $1,000	Yes	Yes
Eligible distributions contributed to another retirement plan or IRA within 60 days	Yes	Yes

Except for a rollover, an exception removes only the 10%: income tax is still due. A birth, adoption or emergency payout repaid within 3 years may count as a rollover (Publication 575).

How much tax is withheld when I cash out?

A 401(k) payout to a resident alien that could be rolled over has 20% withheld, and you cannot choose less. A resident's IRA payout has 10% withheld unless you choose another rate on Form W-4R (2026); a nonresident alien generally has 30% withheld, or a lower treaty rate.

Withholding on a payout to a resident alien in 2026 (Form W-4R).
Payout	Withholding
401(k) or other plan, eligible for rollover	20%; you may choose more, not less
IRA	10% by default; 0% to 100% by choice (generally not under 10% if delivered outside the US)
Hardship distribution (not eligible for rollover)	10% by default; you may choose another rate

A nonresident alien does not use Form W-4R. The payer withholds 30% of the US-source amount unless a treaty lowers it, and may use graduated rates on the part from US work after 1986 (Publication 515 (2026)). To get those rates, give it Form W-8BEN or Form 8233 "before the income is paid" (Publication 519 (2025)); Form W-8BEN also claims a treaty rate.

Publication 515 says most treaties exempt non-government pensions, but "the exemption may not apply to lump-sum payments", so ask a tax preparer. The payer generally reports the payout on Form 1042-S, income code 15 (2026 Form 1042-S instructions; 2026 Form 1099-R instructions).

What does a $20,000 401(k) cash-out cost an H-1B worker?

For a single H-1B worker aged 30 who is a resident alien earning $70,000 in 2026, a $20,000 traditional 401(k) cash-out costs an estimated $6,400 of federal tax. Only $4,000 is withheld, so $2,400 more is due with the return.

Worked example: Kiran, on H-1B, cashes out a 401(k) in 2026

Kiran, an illustrative single H-1B worker aged 30, is a resident alien for all of 2026 and earns $70,000 of wages, with enough withheld to cover the tax on them. After leaving a job, they take their whole $20,000 traditional 401(k) as cash. None of it is after-tax money, and no exception applies.

At payout, the plan withholds 20% of $20,000 = $4,000, and Kiran receives $16,000.

Without the payout: $70,000 minus the $16,100 standard deduction = $53,900, taxed $5,800 plus 22% of ($53,900 minus $50,400) = $5,800 plus $770 = $6,570.

With the payout: $90,000 minus $16,100 = $73,900, taxed $5,800 plus 22% of ($73,900 minus $50,400) = $5,800 plus $5,170 = $10,970.

Extra income tax: $10,970 minus $6,570 = $4,400. Additional tax: 10% of $20,000 = $2,000. Total: $6,400.

Kiran keeps $20,000 minus $6,400 = $13,600, and owes $6,400 minus $4,000 = $2,400 more with the 2026 return.

Only $4,000 of Kiran's $6,400 tax is withheld at the payout.

Kiran's four choices. Estimates for tax year 2026: federal tax only, single, $70,000 of wages.
Choice	Withheld	Tax on the $20,000	Still saved
Cash out	$4,000	$6,400	$0
Roll over $16,000 within 60 days	$4,000	$1,280	$16,000
Roll over $20,000 within 60 days, adding $4,000	$4,000	$0	$20,000
Direct rollover to a traditional IRA	$0	$0	$20,000

Rolling over only $16,000 leaves $4,000 taxable: 22% of $4,000 = $880, plus 10% of $4,000 = $400, or $1,280. In both 60-day cases the $4,000 withheld counts as tax paid (IRS rollover example).

Rates are from Revenue Procedure 2025-32; the IRS Tax Table can differ by a few dollars. A state with an income tax may tax the payout too.

How do I report an early withdrawal on my 2026 return?

A resident alien reports a 401(k) payout on Form 1040, lines 5a and 5b, and the 10% on Schedule 2. A nonresident alien uses the same lines on Form 1040-NR for the part effectively connected with US work, and Schedule NEC for the rest of the US-source part.

On the 2026 draft Form 1040, Kiran's fully taxable $20,000 goes on line 5b, with no entry on line 5a (2025 Form 1040 instructions). If box 7a of the Form 1099-R shows code 1, the $2,000 goes on Schedule 2, line 5, with its box checked; the $4,000 withheld goes on line 25b. An IRA payout goes on line 4b, with the total on line 4a if only part is taxable (Publication 590-B (2025)).

For a nonresident alien, three rules decide where a 401(k) payout goes:

The part "attributable to contributions" for US work is effectively connected income, taxed at graduated rates, "whether or not you are engaged in a U.S. trade or business" that year (Publication 519). It goes on Form 1040-NR, lines 5a and 5b (2025 instructions and the 2026 draft).
The earnings part is US-source if the plan's trust is a US trust (Publication 515). If it is not effectively connected, it goes on Schedule NEC, line 7, taxed at 30% or a lower treaty rate (2025 instructions).
If tax was withheld, attach the Form 1042-S or Form 1099-R to Form 1040-NR.

The 2025 Form 1040-NR instructions name the "additional tax on a qualified plan, including an IRA" as a tax that makes a nonresident alien file. They do not say how it applies to a part taxed on Schedule NEC, or how an IRA payout splits: ask a tax preparer.

F1TaxReturn does not take Form 1099-R or Form 1042-S or prepare Form 1040. For a year with a payout, use a tax preparer or other software.

Are hardship withdrawals and 401(k) loans taxed?

A hardship withdrawal is taxed like any other payout and "may also be subject to a 10% additional tax". A plan loan is not taxed if it meets the loan rules and you repay it; one that breaks them is treated as a payout.

Plans do not have to offer hardship withdrawals. The payout must be "due to an immediate and heavy financial need", and you cannot repay it or roll it over (IRS).

Tuition paid by a 401(k) hardship withdrawal can still owe the 10%: the education exception covers IRAs only. A medical hardship avoids the 10% only up to unreimbursed medical expenses above 7.5% of AGI.

Publication 575 sets three plan loan rules:

It must be repaid within 5 years, unless it buys your main home.
You repay it in substantially level payments at least every quarter.
Counting your other loans from the employer's plans, any part over the lesser of $50,000 or half your vested balance (but not less than $10,000) is a payout.

Any part treated as a payout, such as a loan in default, may owe the 10% too. If you leave your job and the plan reduces your balance to repay a loan in good standing, that is a "qualified plan loan offset". To keep it out of income, roll the same amount into an IRA or plan by your return's due date, including extensions.

For a 2026 offset and a Form 1040, that is Thursday, April 15, 2027, or Friday, October 15, 2027 with a Form 4868 extension. If April 15 has passed without an extension, ask a tax preparer whether you still have time.

Can I take Roth money out early without the 10% tax?

From a Roth IRA, your own contributions come out first and are not income, so they owe neither income tax nor the 10%. From a Roth 401(k), a payout that is not qualified is part contributions and part earnings, and the earnings part is taxed.

Publication 590-B takes conversions and rollovers out next, oldest first, then earnings. Within 5 years from January 1 of the year you converted, the taxed part of a conversion can owe the 10%. Earnings taken before a payout is qualified can owe income tax and the 10%.

A Roth 401(k) payout is generally qualified only after a 5-taxable-year period and at age 59½, death or disability (IRS Roth FAQs). Before that, a payout is split by the account's mix: from $9,400 of contributions and $600 of earnings, $5,000 is $4,700 untaxed and $300 taxed, which can owe the 10%.

How does a rollover avoid the tax?

A direct rollover moves your plan money to an IRA or another plan with nothing withheld; in a traditional IRA, it is generally untaxed until you take it out. Most payments to you can still go into an IRA or plan within 60 days (IRS rollovers page).

The IRS may waive the 60 days if you missed them "because of circumstances beyond your control".
After you leave a job, a plan may pay out a balance of $1,000 or less without your consent, "in most cases" less 20%. A larger balance up to $7,000 may go into an IRA in your name if you do not choose (IRC 401(a)(31)(B); the IRS page still says $5,000).
A plan need not accept rollovers, so ask the new plan first.

For a small internship 401(k), ask the provider whether it keeps accounts for someone on your visa or abroad.

What to do next

Before you choose, read the rollover notice your plan must give you.
If you take cash, set money aside beyond the withholding ($2,400 for Kiran). As a resident, ask for more on Form W-4R, or make estimated tax payments (Publication 575).
As a nonresident alien, give the payer Form W-8BEN or Form 8233 before the payment, and ask a tax preparer about a treaty.
If an exception applies but box 7a of your Form 1099-R shows code 1, file Form 5329.
File your 2026 Form 1040, or Form 1040-NR with wages subject to withholding, by Thursday, April 15, 2027. A Form 1040-NR with no wages subject to withholding is due Tuesday, June 15, 2027 (2027 deadlines).
If you are leaving the US, read the tax checklist for leaving first.

Questions students ask

Do H-1B workers pay the 10% penalty on a 401(k) withdrawal?

An H-1B worker who is a resident alien does, if they take money out before age 59½ and no exception applies. They follow the same rules as a US citizen: income tax on the taxable part plus a 10% additional tax, reported on Schedule 2 (Form 1040). Leaving a job in or after the year you turn 55 is an exception for a 401(k), not for an IRA.

Is the 20% withheld from a 401(k) cash-out all the tax I owe?

Not always. The 20% is a payment toward your tax; your return works out the real amount, which adds the 10% additional tax to income tax at your own rate. In this guide's example, a single H-1B worker aged 30, a resident alien earning $70,000, owes $6,400 on a $20,000 cash-out, $2,400 more than the $4,000 withheld.

Does a hardship withdrawal avoid the 10% tax?

Not by itself. The IRS says hardship distributions "may also be subject to a 10% additional tax", and hardship is not on its list of exceptions. The reason for a hardship can match an exception, such as medical expenses above 7.5% of AGI. Tuition is an exception only for an IRA, not for a 401(k).

Can I withdraw my Roth IRA contributions early without a penalty?

Yes. Publication 590-B treats your regular Roth IRA contributions as coming out first, and they are not included in income, so neither income tax nor the 10% additional tax applies to them. Converted amounts come out next and earnings last; earnings taken before a payout is qualified can owe both.

How much is withheld if I cash out a 401(k) as a nonresident alien?

Without a treaty exemption, the payer generally withholds 30% of the US-source amount under the rules for foreign persons in Publication 515 (2026). It may use graduated rates on the part from your US work if you give it Form W-8BEN or Form 8233 before the payment (Publication 519). Form W-4R is not for nonresident aliens.

Sources

This guide is checked against these 19 documents, most recently on October 28, 2026.