• The IRS imposes hefty penalties for non-qualified distributions from 401k plans.tax forms image by Chad McDermott from Fotolia.com
  
  401k plans are tax-advantaged retirement savings account that employees can contribute to through their employer. Only people who work for a company that offers a 401k plan can use these plans. Contributions to a 401k plan are made using pretax dollars, which means you do not have to pay income taxes on the amount you contribute. However, you do have to pay income taxes on distributions. Qualified distributions occur after you have reached age 59 1/2 or if you retire after age 55. If you take non-qualified distributions, you will have to pay tax penalties.
  
  

Unrepaid Loans

• If you take out a loan against your 401k plan, you must repay it within five years with quarterly payments. If the loan is for a home down payment, you can extend the term of the loan. If you fail to repay the loan, the Internal Revenue Service treats the unrepayed amount as an early distribution and will charge you tax penalties as if you had taken a non-qualified early distribution from the account.
  
  

Early Distributions

• If you take money out of your 401k plan before turning 59 1/2 or leaving your job after turning 55, you will have to pay a 10 percent tax penalty on the amount withdrawn in addition to reporting the distribution as taxable income. Unlike IRA plans, which allow early distributions to be exempt from the 10 percent penalty for a variety of reasons, you can only avoid the 10 percent penalty if you become permanently disabled or if you die before reaching age 59 1/2 and the distributions are made to your heirs.
  
  

Failure to Withdraw Required Minimum Distributions

• When you turn 70 1/2, you must start taking distributions from your 401k plan each year. If you are not retired at age 70 1/2, you can delay minimum required distributions until you retire. The size of the distribution depends on how old you are and how much your 401k plan is worth. If you fail to withdraw the minimum from your 401k plan, you must pay a tax penalty equal to 50 percent of the amount you failed to withdraw. For example, if you were supposed to withdraw $20,000 but didn't take any out, you would have to pay a $10,000 penalty. If you were supposed to take out $20,000 but only took out $12,000, you would pay a penalty of $4,000, or 50 percent of the $8,000 you were supposed to withdraw but didn't.