<prompt> Human: I understand that they need to take a percentage for taxable income, but it doesnt make sense for them to be able to take more and punish me for withdrawing money I earned. Assistant: Because the government is giving a tax break with a 401k in order to encourage people to invest money for retirement. The penalty is part of that incentive. Human: Right...so, they arent taxing money that is deposited into a retirement account. But, why should they take more than what they would normally tax with an early withdrawal? Is it only to discourage me from taking money out? It just doesnt seem fair. I should be able to do whatever I want with my money.  <response>: You can...if you dont want the tax advantage, dont put the money into a tax advantaged account. 