401k Withdrawal Rules: Penalties, Timing & Exceptions For 2025
Written by
Ellie Diamond
Edited by
Joe Evans
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If you’ve been saving for retirement, you’ve probably wondered: when can I actually take money out of my 401(k) without paying penalties?
The IRS has very specific 401(k) withdrawal rules, and breaking them can cost you a 10% penalty on top of regular income taxes. The good news? If you know the key ages, exceptions and strategies, you can avoid costly mistakes and keep more of your retirement savings.
Quick Answer: Most withdrawals before age 59½ are hit with a 10% penalty, unless you qualify for an exception. After 59½, withdrawals are penalty-free, though you’ll still owe income tax on traditional 401(k) funds.
What Counts as an Early Withdrawal?
An early withdrawal is any distribution before age 59½. Here’s how it breaks down:
- Traditional 401(k): Withdrawals are always taxed as ordinary income, plus the 10% penalty if you’re under 59½ (unless you qualify for an exception).
- Roth 401(k): Contributions can be withdrawn tax-free, but earnings are only penalty-free and tax-free if you’re 59½ and the account has been open at least five years.
Stat to know: The IRS collected over $5.7 billion in early withdrawal penalties in 2022 alone — proof that many savers still get tripped up by the rules (IRS Data Book, 2023).
Taxes vs. Penalties
| Scenario | Taxed as Income? | 10% Penalty? |
|---|---|---|
| Withdrawal after 59½ | Yes | No |
| Withdrawal before 59½, no exception | Yes | Yes |
| Rule of 55 (quit at 55+) | Yes | No |
| SEPP (72(t) plan) | Yes | No |
| Disability or death | Yes | No |
| Medical expenses > 7.5% AGI | Yes | No |
Exceptions That Waive the 10% Penalty
Even if you’re younger than 59½, certain situations let you access your 401(k) without the 10% hit.
Rule of 55
If you leave your job in or after the year you turn 55, you can withdraw penalty-free from that employer’s plan. This is a popular option for early retirees.
SEPP (Substantially Equal Periodic Payments/72(t))
Take equal payments over five years or until 59½, whichever is longer. Once started, you can’t stop without triggering retroactive penalties.
Disability or Terminal Illness
If you’re permanently disabled or if distributions are made after death, the penalty is waived.
Medical Expenses Over 7.5% of AGI
You can tap your 401(k) for unreimbursed medical costs above 7.5% of your adjusted gross income, penalty-free.
QDRO (Qualified Domestic Relations Order)
Court-ordered payments to a spouse, child, or dependent are not penalized.
IRS Levy
If the IRS levies your plan to cover back taxes, the 10% penalty doesn’t apply.
Stat to know: About 2.1 million Americans took hardship withdrawals from 401(k)s in 2022, a 36% increase year-over-year.
How 401(k) Taxes Work
- Traditional 401(k): Withdrawals are always taxed as ordinary income. If you withdraw $20,000 in the 22% bracket, you’ll owe $4,400 in federal income tax (plus state tax if applicable).
- Roth 401(k): Withdrawals are tax-free if you’re 59½+ and the account has been open at least 5 years. Otherwise, earnings are taxable and may face penalties.
Stat to know: The average 401(k) balance reached $118,000 in 2023, according to Fidelity, making tax-efficient withdrawals more important than ever.
What Happens When You Leave a Job?
You generally have four choices:
- Leave the money in your old plan (if allowed).
- Roll it into a new employer’s 401(k).
- Roll it into an IRA for broader investment choices.
- Cash it out (not recommended unless you need the money urgently).
Cashing out triggers taxes plus the 10% penalty if you’re under 59½, which can reduce your balance by 30% or more in some cases (GAO Retirement Report, 2021).
Hardship Withdrawals vs. Loan
There are some key differences between these two methods that you’ll need to know. Here’s a breakdown of each:
Hardship Withdrawals
- Allowed only for “immediate and heavy financial need.”
- Always taxable; often penalized unless another exception applies.
- Requires documentation.
401(k) Loans
- Borrow up to the lesser of $50,000 or 50% of your vested balance.
- No tax or penalty if repaid (usually within 5 years).
- If you leave your job or default, the loan becomes a taxable distribution (with penalties if under 59½).
Stat to know: The Employee Benefit Research Institute (EBRI) shows that 15% of eligible participants had loans outstanding in 2022, so it’s an increasingly common course of action to take.
Real-World Withdrawal Examples
| Example | Age | Scenario | Taxed as Income? | 10% Penalty? |
|---|---|---|---|---|
| “I need $5,000 for a vacation.” | 45 | No exception | Yes | Yes |
| “I left my job at 56.” | 56 | Rule of 55 | Yes | No |
| “I set up SEPP payments.” | 50 | 72(t) schedule | Yes | No |
| “Roth 401(k) withdrawal.” | 60 | Qualified | No | No |
| “Medical bills exceed 7.5% AGI.” | 52 | Exception applies | Yes | No |
How to Minimize Taxes and Penalties
- Time withdrawals wisely. Waiting until 59½ avoids the penalty entirely.
- Use exceptions smartly. Rule of 55 and SEPP can bridge income gaps.
- Spread withdrawals. Avoid jumping into a higher tax bracket.
- Tap Roth if qualified. A Roth 401(k) that passes the 5-year test can provide tax-free income.
- Keep records. Document exceptions with IRS Form 5329 and keep statements handy.
Final Take to GO: Know the Rules, Keep More of Your Money
The bottom line: 401(k) withdrawal rules don’t have to be confusing. Most penalties can be avoided if you understand the age 59½ threshold, the 10% penalty exceptions and how taxes differ between traditional and Roth 401(k)s.
With a little planning — and good recordkeeping — you can access your savings without giving up thousands to the IRS.
Next steps:
- Run your numbers with the retirement calculator.
- Brush up on 401(k) taxes before you withdraw.
- Explore whether your 401(k) is still worth it compared to other retirement accounts.
FAQs About 401(k) Withdrawal Rules
Here are the answers to some of the most frequently asked questions about 401(k) withdrawal rules and how they work:- When can I withdraw from my 401(k) without penalty?
- After age 59½, or earlier if you qualify for exceptions like Rule of 55, SEPP, disability or medical expenses.
- What is the Rule of 55?
- If you separate from your job the year you turn 55 or later, you can take penalty-free withdrawals from that employer’s 401(k).
- How are 401(k) withdrawals taxed at age 60?
- No penalty applies. Traditional 401(k) withdrawals are taxed as income; Roth 401(k) withdrawals are tax-free if qualified.
- What happens when I change jobs?
- You can keep your old 401(k), roll into a new plan, roll into an IRA or cash out. Rolling avoids taxes and penalties.
Information is accurate as of Oct. 3, 2025.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- Employee Benefit Research Institute "401(k) Plan Asset Allocation, Account Balances and Loan Activity in 2022"
- IRS "Retirement topics - Hardship distributions"
- IRS "Retirement topics - Exceptions to tax on early distributions"
- Fidelity "Q4 2023 Retirement Analysis"
- PBS News "Why more Americans are making hardship withdrawals from retirement accounts"
- U.S. Department of Labor Employee Benefits Security Administration "The Division of Retirement Benefits Through Qualified Domestic Relations Orders"
