You pay a 10% penalty for early withdrawal (and a hefty one for late withdrawal, but that's a long way off for you). You pay NO penalty if you are retired ( I did at 55 with no penalty) or you are over 59 1/2. There are also about 10 exceptions ( such as down payment on a house of $10,000 for a first time buyer, emergency medical expenses etc.) So if you are over 591/2 or retired you can withdraw any amount you want with no penalty. The amount falls through to your ordinary income and is taxed as such. That's why it is such a good idea to keep your money in a 401K as long as possible as it allows you to pyramid the non-taxed portion in investments (over 30% if you are in the upper brackets), but eventually you will have to pay uncle Sam..I think it starts at around 69 1/2 where you have to draw down the 401 according to your life expectancy.