How To Withdraw Money From Your 401(k)

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A 401(k) withdrawal may seem far away when you open the account, but the time comes for everyone. It may happen when you’ve retired or reached a certain age. For some, it might be when an emergency expense exceeds their resources.

Check Out: The Surprising Way You Can Get Guaranteed Retirement Income for Life

You can withdraw with no penalty if:

• You’re age 59 ½ or older
• You leave or lose your job at age 55 or older (50 for certain public servants) or are permanently disabled
• You qualify for a hardship withdrawal

You’ll have to pay a penalty if you don’t meet those requirements.

Here’s what you need to know about how to withdraw money from your 401k and how to decide whether it is the right choice.

When Can You Withdraw From Your 401(k) With No Penalty?

You can usually make a 401(k) withdrawal with no tax penalty at age 59 ½. If you leave your job during or after the year you turn 55 you can withdraw from your 401(k) immediately without penalty. 

You can withdraw at 50 if you’re a:

• Federal law enforcement officer
• Private-sector firefighter
• Air-traffic controller

However, you will owe income tax on the withdrawal.

If you meet the minimum age requirement, withdrawing is as simple as contacting the company that holds the account to submit a request.

How To Withdraw Money From Your 401(k)

The IRS imposes penalties to discourage 401(k) account holders from using their accounts as ordinary savings vehicles. Unless you qualify for an exception, the IRS will charge a 10% penalty tax on whatever you withdraw before reaching retirement age.

Plus, there is a mandatory 20% withholding on any distribution, except for funds rolled over to another retirement account. Withholding means the IRS holds that money and applies it to your income taxes.

That said, not all plans allow for early withdrawal. Check your plan documents to see if it’s available. If you can withdraw, find out what requirements you have to fulfill. Here are a few options you might be able to consider.

Hardship Withdrawals

The IRS allows 401(k) account holders to withdraw funds for hardship, defined as “an immediate and heavy financial need.”

How Do You Qualify for a Hardship Distribution?

Examples of qualifying financial hardship include the following:

• Diagnosis with a terminal illness
• Unreimbursed medical expenses above 7.5% of adjusted gross income
• Costs related to the purchase of a primary home
• Tuition and eligible educational expenses
• Foreclosure or eviction avoidance
• Home repairs that qualify for a casualty deduction or that occurred in a federally declared disaster area (up to $22,000 per qualified individual)
• Personal emergency (once per year, up to the lesser of $1,000 or vested balance over $1,000)
• Birth or adoption of a child (up to $5,000 per child for qualified expenses)
• Death or disability
• Domestic abuse victim (up to the lesser of $10,000 or 50% of account)
• Qualified domestic relations order to divide the 401(k) as part of a divorce agreement
• Automatic enrollment in the plan
• Military reservist called to active duty
• In-plan Roth rollover or rollover into an individual retirement account within 60 days of the withdrawal

Always verify your eligibility with a tax professional, as IRS rules may change.

You might still be able to take a hardship withdrawal if you don’t meet the exception requirements. However, you’ll be subject to a 10% tax penalty on top of the required income tax.

It’s also important to know that there are limitations on hardship withdrawals. First, you can’t withdraw more than the amount required to meet the immediate need. Before the distribution is authorized, you must attest that you can’t meet your needs using other resources, like via insurance or selling your possessions. 

Additionally, you can only withdraw funds from your or your employer’s contributions. You can’t withdraw from the account’s investment earnings.

Exceptions for Special Emergency Distributions Under SECURE 2.0 Act

There were significant rule changes under the SECURE 2.0 Act to allow penalty-free withdrawals for retirement accounts prior to the age 59 1/2 .

• Yearly Penalty Free Withdrawals. You can withdraw up to $1,000 yearly from qualified retirements (401(k), 403(b), 457(b) or IRAs without incurring a 10% tax penalty.
• Tax Liability. All withdrawals are subject to ordinary income tax.
• Repayment. If the amount withdrawn is not paid within three years, no penalty-free withdrawals for personal emergencies can be made during that period.
• Self-certification requirement. To qualify for this distribution, you must self-certify (in writing) to their employers that the withdrawal was due to an emergency.

Substantially Equal Periodic Payments 

If you don’t qualify for a hardship exemption, you may be able to set up a series of substantially equal periodic payments, also known as SoSEPP. SoSEPP payments allow a 401(k) account holder to collect regular payments for life based on their calculated life expectancy.

SoSEPP payments come with several restrictions. For example:

• You can take SoSEPP payments only if you no longer work for the sponsoring employer.
• You can’t make any changes to the account or take other payments from it.
• You can’t change the SoSEPP plan for five years or until you reach age 59 ½, whichever is later unless you become disabled or in the event of your death.

Consult with a financial professional or plan administrator if you need to set up a SoSEPP for your 401(k). The process is complicated, and penalties can be costly.

How Can I Borrow Money From My 401(k) Without Penalty?

Contact your plan administrator to find out if your plan allows loans. If it does, you can borrow up to $50,000 or 50% of your vested account balance, whichever is less.

401(k) loans work like standard loans in that you’re responsible for paying it back with interest. Bear in mind that if you default on the loan, it will be considered a distribution, meaning you could get hit with a penalty for early withdrawal. 

Keep in Mind

If you leave your company, repaying your balance will be due within a short time, typically less than a year. If you don’t meet the deadline, your loan will be treated as a distribution and be subject to an early withdrawal penalty.

Alternatives to 401(k) Withdrawals

Chances are that you have other options for raising cash besides withdrawing or borrowing money from your 401(k) account.

Take Out a Margin Loan

If you have other investments besides your 401(k), you could borrow money from the brokerage using your portfolio as collateral.

According to Charles Schwab, “Margin loans typically require a minimum of $2,000 in cash or marginable securities and generally are limited to 50% of the investments’ value.”

The margin account used for the loan is a line of credit, so you can use your credit line, repay it and then use it again. However, Schwad warned borrowing too much or losing your securities’ value could be very costly.

Borrow Against Your House

A home equity loan or line of credit lets you tap into the equity you’ve built in your home to satisfy larger cash needs.

The loans are expensive because you’ll pay closing costs and other fees. If the lender claims it’s a no-fee loan, you’ll be charged higher interest to make up for it. And they’re risky because you’ll lose your home if you default.

However, the interest might be tax deductible, a definite benefit for a large loan.

Personal Loan

Personal loans give you access to anywhere from several hundred dollars to six figures. Some lenders’ best rates are comparable to mortgage rates, although you’ll likely need excellent credit and smaller loan amounts to qualify.

Deciding When To Make Your 401(k) Withdrawal

It’s always best to keep money in your 401(k) until you reach age 59 ½. Waiting gives your money more time to grow and lets you avoid paying a penalty.

Don’t go straight to an early withdrawal if you need funds. Instead, start with other strategies, like:

• Personal loans
• Home equity loans
• Lines of credits

If withdrawing is your best option, try to take advantage of a penalty-free option. Before moving, speak with a tax advisor to find the best solution.

Final Takeaway

Early withdrawals from a 401(k) will likely present long-term financial downsides. Usually withdrawing from your 401(k) prior to turning 59 1/2 results in a 10% early withdrawal penalty. The amount withdrawn is also subject to income taxes. There are exceptions where you can withdraw without incurring a penalty. Some of those circumstances include significant medical expenses, disability, or first-time homebuyer expenses. If you are considering early withdrawal from your 401(k) it might be good to talk to financial advisor to assess alternative options so that it won’t impact your future financial security.

Information is accurate as of Nov. 15, 2024.

Rudri Patel, Daria Uhlig, Vance Cariaga, Kathryn Pomroy and John Csiszar contributed to the reporting for this article.

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