How to Withdraw Money From a 401(k) Before Retirement

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You can take money out of a 401(k) before age 59½ through a hardship withdrawal, a 401(k) loan, or by qualifying for an exception to the early withdrawal penalty. Common exceptions include disability, certain medical expenses, or a qualified birth or adoption.

However, most early withdrawals are subject to income taxes and a 10% penalty. It’s important to understand the consequences and explore all your options before tapping into retirement savings early.

Rules for Withdrawing From a 401(k) Early

You can begin taking standard withdrawals from your 401(k) at age 59½ without penalties. Taking money out before then–whether it’s from your contributions or investment earnings–usually results in income taxes based on your tax bracket, plus a 10% early withdrawal penalty.

Even if you qualify for a penalty exception, withdrawing early can significantly reduce your retirement savings. You lose the power of compound growth and may risk falling short of your long-term financial goals. That’s why it’s critical to understand the rules, know the available exceptions, and carefully weigh the consequences before accessing your 401(k) ahead of schedule.

Penalty-Free Exceptions to 401(k) Early Withdrawal

The IRS extends a handful of exemptions to the 10% penalty for early withdrawals. For example, the ‘rule of 55’ removes the penalty from those who leave their job in or after the year they turn 55.

You might also be able to withdraw penalty-free in these situations:

• First-time home purchase, for withdrawals up to $10,000, if rolled into an IRA
• Medical expenses exceeding 7.5% of adjusted gross income (AGI)
• Permanent disability
• Substantially equal periodic payments (SEPP)
• Birth or adoption expenses of up to $5,000

However, please note that since they’re funded with pre-tax money, all 401(k) withdrawals, whether made before or after 59 1/2, are subject to income tax.

What Are 401(k) Hardship Withdrawals?

The IRS recognizes some situations that qualify for hardship withdrawals, which it cites as those made “because of an immediate and heavy financial need.”

They’re limited only to the amount required to satisfy that need, including qualifying medical bills, funeral costs and foreclosure avoidance, and must be backed up by verifying documentation. Like all 401(k) withdrawals, they’re taxed as income and still may incur penalties.

401(k) Loan vs. Withdrawal: Which Is Better?

Some, but not all, 401(k) plans permit qualified employees to borrow against their accounts, typically for a maximum of $50,000 or 50% of their vested balance. 401(k) loans, which generally must be repaid with interest within five years, can serve as a last-resort alternative to early withdrawals. However, both options have benefits and drawbacks to consider.

Early 401(k) Withdrawal

401(k) Loan

Tax Consequences of Early Withdrawals

If you take a 401(k) withdrawal before age 59½, the IRS typically charges a 10% early withdrawal penalty. For example, on a $10,000 withdrawal, you’d owe $1,000 right off the top.

You’ll also pay regular income taxes on the amount. If you’re in the 22% tax bracket, that’s another $2,200–leaving you with just $6,800 from your original $10,000.

In most cases, the IRS also requires your plan to withhold 20% of the distribution upfront, even if you intend to roll the money over. And depending on your state, you might owe additional state income taxes, too.

Alternatives to Withdrawing From a 401(k) Early

Early 401(k) withdrawals should be a last resort for the most dire of circumstances and only after all other options have been exhausted. Before you tap your employer-based retirement fund early, consider options including:

• Emergency savings
• Personal loans
• Brokerage margin loans
• Home equity loans or lines of credit, if applicable
• Roth IRA contributions, which can be withdrawn without tax or penalty at any age for any reason
• 401(k) loan as a last resort

Tips to Reduce the Impact of an Early 401(k) Withdrawal

If you’ve exhausted all other options and you have no choice but to make an early withdrawal, consider the following tips for minimizing the damage and mitigating the consequences.

• Take only what you absolutely need to manage the crisis that necessitated the withdrawal
• Increase you’re future contributions once you’re financially stable to catch up
• If eligible, consider rolling over to an IRA for more flexibility

The High Cost of Withdrawing from Your 401(k) Early

Consider an early withdrawal from a 401(k) as an option of last resort only in the direst of circumstances. Consequences include taxes, penalties, lost investment growth, a diminished nest egg and a significant step back in the lifelong journey to save for a comfortable retirement. Always consider alternatives like loans — even from family and friends — before tapping your 401(k) before 59 1/2. 

Talk to a financial advisor before making any early 401(k) withdrawals to avoid costly mistakes.

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