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, or it might be when an emergency expense exceeds your other resources.
Whatever your circumstances, here’s what you need to know about making a 401(k) withdrawal and how to decide whether it is the right choice.
When Can You Withdraw From Your 401(k) With No Penalty?
In most cases, you can make a 401(k) withdrawal with no tax penalty when you reach age 59½. That’s the age that the IRS considers to be the standard minimum retirement age. There is a provision for early retirement, though. If you leave your job during or after the year you turn 55, you can withdraw from your 401(k) immediately without penalty.
If you retire between the ages of 59½ and 72 — or 73, if you will reach age 72 in 2023 or later– 401(k) withdrawals are optional. However, once you reach 72 or 73, you must start taking the required minimum distribution. Your RMD depends on your account balance and life expectancy.
If you meet the minimum age requirement, withdrawing is as simple as contacting the company that holds the account. For example, if you want to withdraw from a Fidelity 401(k), you can download a withdrawal request form online or call the company’s toll-free number.
How To Withdraw From Your 401(k) Early
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% tax on whatever you withdraw before you reach retirement age. Plus, there is a mandatory 20% tax on any distribution, except for funds rolled over to another retirement account.
That said, not all plans allow for early withdrawal. Check your plan documents to see if it is available. If you can withdraw, find out what requirements you have to fulfill. Here are a few options you might be able to consider.
The IRS allows 401(k) account holders to withdraw funds for hardship, which is defined as “an immediate and heavy financial need.”
How Do You Qualify for a Hardship Distribution?
Examples of qualifying financial hardship include the following:
- Medical expenses
- Costs related to the purchase of a primary residence by a first-time buyer
- Tuition and related expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse or dependent
- Rent or mortgage payment to prevent eviction or foreclosure
- Funeral expenses for the employee or employee’s spouse, dependents or beneficiaries
- Certain expenses to repair damage to the employee’s residence
The IRS has specific rules about circumstances that qualify for an exception. For example, you can avoid penalties for qualifying medical expenses only if those expenses exceed a certain percentage of your income. Always verify your eligibility with a tax professional, as IRS minimums and maximums 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 in addition to the required income tax.
What Are the Rules for Hardship Withdrawals?
There are limitations on hardship withdrawals. First, you can’t withdraw more than the amount required to meet the immediate need. Before your employer can authorize the distribution, you must attest that you can’t meet your need using other resources, for example, through insurance or by selling your possessions.
Also, you may only withdraw funds from your or your employer’s contributions. You may not withdraw from the account’s investment earnings.
A 401(k) loan is a good option as long as you are confident you’ll be able to repay the loan. Some 401(k) plans let you borrow up to $50,000 or 50% of your vested account balance, whichever is less. If your account balance is less than $10,000, you can borrow up to $10,000. Terms usually include repaying the loan within five years using quarterly or possibly more frequent payments. In some circumstances — for example, borrowing for a home down payment — you may be able to get an extended repayment period.
401(k) loans work like standard loans in that you are responsible for paying back the borrowed funds 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, you’ll repayment of the 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.
Substantially Equal Periodic Payments
If you have a financial need that doesn’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 59½, whichever is later, unless or 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.
Roll Over to Another Retirement Plan
You might be planning to withdraw funds for reasons other than needing additional income. One example would be if you’re not happy with your plan administrator. You can roll over the funds to another plan, such as an individual retirement account or Roth IRA. Roth IRAs take after-tax contributions, but your withdrawals are tax-free.
There is no penalty on funds you transfer from a 401(k) to an IRA. However, if you choose not to transfer the full balance and keep some of the funds, you’ll pay a 10% penalty on those funds.
Deciding When To Make Your 401(k) Withdrawal
Remember that your 401(k) is retirement savings, and you will one day depend on that money to pay your bills. An early withdrawal will reduce your account balance, which could leave you behind in your savings goals. In addition, and perhaps more costly, are the opportunity costs — lost investment returns on the amount you withdraw. The more time you have before you retire, the more you stand to lose in lost growth opportunities.
It’s always best to keep money in your 401(k) until you reach age 59½. Then, you can choose to start taking distributions or wait until you reach RMD age. Waiting gives your money more time to grow.
If you feel you have no other choice but to withdraw, try to take advantage of a penalty-free option such as the SoSEPP or hardship exemption. Before making a move, speak with a tax advisor to find the best solution.
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.
- IRS. "Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs."
- IRS. "Retirement Topics — Required Minimum Distributions (RMDs)."
- IRS. "401(k) Resource Guide - Plan Participants - General Distribution Rules."
- IRS. "Retirement Topics - Hardship Distributions."
- IRS. 2022. "Retirement Topics - Exceptions to Tax on Early Distributions - IRS."
- IRS. "Retirement Topics - Plan Loans."
- IRS. 2022. "Substantially Equal Periodic Payments."
- IRS. 2023. "Traditional and Roth IRAs."
- IRS. "Topic No. 413, Rollovers From Retirement Plans."