Know Better Plan Better
Advertiser Disclosure

How to Withdraw Money From Your 401(k)

Avoid 401k Withdrawal Penalties

Editors Note: Our editors’ evaluations and opinions are not influenced by our advertising relationships. We may earn a commission when you click on our affiliate partners’ links. Many of the links to brands we link to may be affiliate links.

Jason Steele
Updated December 21, 2021
8 Min Read

The 401(k) is an amazing, employee-sponsored savings vehicle that allows you to invest money towards retirement while receiving tax advantages. The money that you invest in your 401(k) is considered pre-tax income, which is to say that it’s not taxed in the year that it was earned. And with many companies offering matching plans, the 401(k) has become an extremely popular retirement savings vehicle.

However, and while you will pay taxes on your withdrawals, it could be in a lower tax bracket by the time you’ve retired. Ideally, you wouldn’t withdraw money from your 401(k) until retirement, but there are some reasons why it may become necessary to do so beforehand. And while there can be penalties for making an early withdrawal, your goal should be to avoid or minimize them.

The early withdrawal option

With a 401(k) retirement savings account, you always have the option of making an early withdrawal. A withdrawal is considered early if you are no longer employed by the company that sponsored your 401(k) plan, and you are younger than 59and 1/2 years of age. Withdrawals are actually required after you reach 72 years of age. This is referred to as a retired minimum distribution, or RMD.

That said, you should be extremely reluctant to make an early withdrawal, as you will likely incur costly penalties. The penalty for standard early withdrawal is 10% of the amount of you receiving. You will also have to pay the standard income taxes on any funds withdrawn early. However, the early withdrawal penalties don’t apply if you left the job during or after the calendar year in which you reached age 55. There are also exceptions for public safety works, the disabled and those who have major medical expenses.

How much tax do I pay on 401k withdrawal?

When you make an early withdrawal from a 401(k) account, you’ll have to pay the normal taxes on that income. If you are working, that additional taxable income can put you in a higher tax bracket than you would have been if you had withdrawn the funds after retirement, which would have defeated much of the advantage of using the 401(k) in the first place.

When Can I Withdraw Funds From My 401(k) without penalty

Your ability to withdraw funds without penalty will be based on your age, and you’ll fit into one of four age groups that will determine the penalties and requirements for 401(k) withdrawals.

Participants under 55

If you’re under 55 years of age, then you will incur penalties for an early 401(k) withdrawal unless you qualify for one of the few exemptions. One exception is that you only have to 50 to withdraw without penalty if you are a public safety worker such as a firefighter, air traffic controller or police officer. Another way to withdraw your money before age 55 (or at any time) is to directly roll over your 401(k) plan into a qualifying new account. Other exceptions include total and permanent disability, medical expenses exceeding 7.5% of your adjusted gross income, withdrawals made because of an IRS levy plan, qualifying disaster distributions and your status as active duty military or a qualified reservist.

Participants under 55 to 59 and ½ years old

Once you reach the age of 55, you can make standard withdrawals without facing early withdrawal penalties. In fact, you don’t even have to wait until your 55th birthday, you can make a standard withdrawal any time in the calendar year that you turn 55 and leave your job. Additionally, your employer may permit you to withdraw money before you turn 59.5 if you are facing a hardship. However, you must have the approval of your company if you want to withdraw money at this age without incurring a penalty.

Participants 59.5 to 72 years old

After you reach 59.5 year of age, you can always withdraw money without a penalty and without having to qualify for one of the previously mentioned exceptions.

Participants age 72 and older

After you reach age 72, you must take Required Minimum Distributions (RMD) from your (401k) plan. At that time, you must start taking regular monthly distributions that are calculated based on your life expectancy.

How to take out funds from your 401(k) without penalty

Thankfully, there are several other options besides early withdrawal that can allow you to access funds from your 401(k) accounts. These options can allow you to reduce or completely avoid the normal penalties that come from an early withdrawal. However, if you’re still working, you don’t have to take money out of your account until you’re 72.

COVID related early withdrawals

After the COVID-19 pandemic occurred in 2020, Congress passed the CARES Act which included several new ways to withdraw from 401(k) plans without incurring penalties. To qualify for an early withdrawal loan under the CARES Act, you or a family member must have tested positive for COVID-19 using a CDC approved test. You can also qualify if you’ve been furloughed or laid off. Alternatively, you can make a penalty-free withdrawal if you couldn’t work due to a lack of childcare, or if your place of work has had to close or reduce its hours substantially.

But to receive your 401(k) withdrawal without paying taxes or penalties, you’ll have to repay the amount over the next three years. If you fail to do so, you’ll have to pay back taxes on the amount withdrawn and possibly the standard penalties and interest payments.

401(k) Loans

Many 401(k) plans allow participants to take money out without penalty as a loan. These loans are limited to $50,000 or half your account’s vested balance, whichever is less. Furthermore, you will be charged interest on that loan, and the money lent will not appreciate with the rest of your investments. So while you won’t incur the 10% penalty of an early withdrawal, or have to pay taxes on the funds you access, you’ll still incur the cost of interest while failing to realize any appreciation that the investment would have realized had you kept it.

The Hardship Withdrawal Option

Some 401(k) plans also allow you to access funds due to an “immediate and heavy” financial need. Examples of such expenses include major medical expenses, purchases of your primary residence (or the prevention of foreclosure), tuition and educational expenses and funeral and burial expenses. You can also claim a hardship withdrawal to pay for losses incurred on your primary residence due to fires, floods, earthquakes and other disasters. On the other hand, more discretionary purchases not eligible for hardship withdrawals, such as a new car or a vacation. You can’t qualify for a hardship withdrawal when you have other assets that can be used for the expense. However, the requirement to first seek a 401(k) loan was eliminated in legislation that passed in 2018.

Unlike a 401(k) loan, hardship withdrawals, when offered by individual plans, do not have to be repaid. But taking a hardship withdrawal means that you can’t make any new 401(k) contributions for six months. In many cases, you’ll incur the 10% withdrawal penalty, but there are some exceptions including total and permanent disability, medical expenses that exceed 10% of your adjusted gross income (AGI), separation from your employer after age 55 and certain distributions to qualified military reservists called to active duty. And just as with any other loan or withdrawal, you’ll have to pay taxes on the amount received, and you’ll stop earning interest on the amount that would have otherwise been invested.

Substantially Equal Period Payments (SEPP)

Another option for accessing funds from your 401(k) is called Substantially Equal Period Payments, or SEPP. This option allows people under the age of 59and 1/2 to receive funds without having to pay the 10% withdrawals penalty. A SEPP plan allows you to withdraw funds through a five year period, or until you turn 59 and ½.

To use a SEPP plan, you must pick from one of three IRS approved methods for calculating your distribution: amortization, annuitization, and required minimum distribution. The amortization method offers an annual payment that’s the same for each year of the program, using your life expectancy or that of the beneficiary and an interest rate that can’t exceed 120% of the IRS’s federal mid-term rate. Using the annuitization method, you receive the same distribution each year, which is determined by your age (or that of your beneficiary, using the mortality table provided by the IRS. Finally, the required minimum distribution method has an annual payment for each year that is determined by dividing your account’s balance by the life expectancy factor of the taxpayer and any applicable beneficiary. Using the required minimum distribution method, the annual amount you receive will be adjusted annually, and will often result in lower withdrawals than the other methods. Regardless of which distribution plan you choose, you can change it a single time during the lifetime of the plan.

Finally, you should note that there are few disadvantages to SEPP plans. First, you can’t use a SEPP plan with a 401(k) plan you hold from a current employer. Also, if you cancel the plan before the minimum holding period concludes, you’ll have to pay the IRS for all of the penalties you would normally have paid for an early withdrawal, including interest.

Frequently Asked Questions

At what age can you withdraw from 401k?

You can withdraw your money at any age, but if most people do so before age 55 (Which can be age 50 if you are a public safety worker such as a firefighter, air traffic controller or police officer), then they’ll have to pay a penalty on their withdrawal. There are also other exceptions to the age 50 rule including those with total and permanent disability and medical expenses exceeding 7.5% of your adjusted gross income. You can also make withdrawals without penalty because of an IRS levy plan, qualifying disaster distributions and your status as active duty military or a qualified reservist.

What is the penalty for withdrawing 401(k) early?

The IRS levies a penalty of 10% of the amount withdrawn if you don’t qualify for one of the listed exceptions. This is in addition to any taxes you would pay.

How much tax do I pay on 401(k) withdrawal?

It depends on several factors. For example, if you roll over your 401(k) into a qualifying Individual Retirement Account (IRA), then you won’t pay any taxes. Failing that, there is a mandatory federal income tax withholding of 20% of your withdrawal, and it’s ultimately tax as any other investment income. The advantage is that those who are retired will likely be in a lower tax bracket than had they made the withdrawal while they were also earning employment income. But if you’re currently in a tax bracket below 20%, you’ll have to wait until you file your taxes to receive the refund.

Can I cash out my 401(k) while still employed?

You cannot cash out your 401(k) if you are still employed by the company that sponsors the plan. However, you can take out a loan against it. But once you’ve separated from the company, you can withdraw money into the account, while paying any applicable penalties.

Does withdrawing from a 401(k) affect my tax return?

Your 401(k) withdrawals (that aren’t rolled over to a qualifying IRA) must be reported to the IRS and they are taxed as income. By waiting until you’re 59 and ½, you can avoid paying the penalty, but the amount you receive is considered to be investment income and is taxed as such. However, you won’t be paying employment taxes as you would have on income you earned from work. And since you made contributions to your 401(k) as pre-tax income, you have avoided paying taxes on your contributions in the years that they were earned.