Small IRA, 401(k) differences can lead to big tax consequences

Writing for The Wall Street Journal, tax expert Laura Saunders explains the necessity of carefully reading the tax rules that affect the use of IRA and 401(k) funds. Failure to adhere to IRS regulations can result in a large unexpected tax bill. Especially if you are taking an early withdrawal, double check advice from a tax professional to ensure you won't owe a tax penalty.
"Because tax-favored retirement accounts are supposed to be for retirement, the rules often impose tax and a 10% penalty on withdrawals before age 59½. Younger IRA owners who take out up to $10,000 to purchase a first home don’t owe the penalty, while younger 401(k) participants do."
“The IRA and 401(k) rules are full of these booby-traps, and they hurt a lot of smart people who aren’t retirement experts,” says Natalie Choate, an attorney and retirement-plan specialist.

Education-expense withdrawals. Payouts before age 59½ from an IRA that are used for higher-education tuition, books and other costs are exempt from the 10% penalty. Similar withdrawals from 401(k) plans incur it.
 
Age 55—59½ payouts. Savers don’t owe the 10% penalty on withdrawals from a 401(k) before age 59½ if they were at least 55 in the year they left their job. But a 10% penalty applies to IRA withdrawals before the owner is 59½, except for certain exemptions.

Borrowing. Many 401(k) plans allow participants to borrow from them. Borrowing against an IRA is prohibited.

Creditor protection. Employer-provided plans such as 401(k)s are better shielded from creditors than are IRAs.