401(k) Withdrawal Rules: How to Avoid Penalties

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Fees and Returns

1. Best Strategies to Maximize Your 401(k)
2. What Return Rate Should I Expect on my 401(k) Returns
3. 401(k) Fees: Everything You Need to Know
4. Best Ways to Use Your 401(k) Without a Penalty
5. Income Limits for 401(k)s: Highly Compensated Employees
6. What to Do After You've Over-Contributed to Your 401(k)
7. Divorce and 401(k): What You Need to Know

Retirement and 401(k)s

1. Average 401(k) Balance by Age
2. What to Do After You Max Out Your Plan
3. How Do 401(k) Catch-Up Contributions Work?
4. How 401(k) Works After Retirement

Other Types of 401(k)s and Retirement Plans

1. Managing Your Own 401(k)
2. What is a Solo 401(k) or Self-Employed 401(k)?
3. SIMPLE 401(k) Plans
4. Small Business 401(k)s: How to Leverage the Muliple Employer DOL Rule
5. Can I Fund a Roth IRA and Contribute to My Employer's Retirement Plan?
6. Must-Know Rules for Converting Your 401(k) to a Roth IRA
7. What Are the Risks of Rolling My 401(k) Into an Annuity

Employer-sponsored 401(k) plans allow employees to contribute a portion of their salary to retirement savings before Internal Revenue Service (IRS) tax withholding. Companies commonly match a percentage of the employee’s contribution and add it to the 401(k) account.

For those who invest in a plan, there are withdrawal rules if you want to take money out without incurring a penalty. Generally speaking, you may withdraw funds from your retirement savings account anytime, but if you do so before you reach age 59½, you may face an IRS charge of 10%.

According to 401(k) withdrawal rules, penalty-free withdrawals (called qualified distributions) are allowed once you reach age 59½. And, after age 72 or 73, depending on the year you were born, you must take required minimum distributions (RMDs) from either a 401(k) or an individual retirement account (IRA).

Here’s a look at the 401(k) withdrawal rules and how you can avoid the IRS 10% penalty if you withdraw money from your account early.

Can I Cancel My 401(k) and Cash Out While Still Employed?

No, you usually can’t close an employer-sponsored 401k while you’re still working there. You could choose to suspend payroll deductions; however, you would lose pretax benefits and any employer matches.

Key Takeaways

• 401(k) withdrawal rules affect when account holders can take withdrawals without penalty.
• If you retire after age 59½, you can start taking withdrawals without paying an early withdrawal penalty.
• The IRS allows for hardship withdrawals that usually are not subject to the 10% penalty.
• You may be able to make a penalty-free withdrawal if you meet certain criteria, such as adopting a child, becoming disabled, or suffering economic losses from a federally declared disaster.
• To keep contributing after retirement, you’ll need to roll over your 401(k) into an individual retirement account (IRA) and have earned income that you can add to the account.
• With both a 401(k) and a traditional IRA, you will be required to take minimum distributions starting at age 72 or 73, depending on the year you were born.

401(k) Withdrawals Before Age 59½

Tax-advantaged retirement accounts, such as 401(k)s, exist to ensure that you have enough income when you get old, finish working, and no longer receive a regular salary.

From time to time, you may be eager to tap into your funds before you retire; however, if you succumb to those temptations, you will likely have to pay a hefty price. This can include early withdrawal penalties and taxes: federal and state income taxes and a 10% penalty on the amount that you withdraw.

Most Americans retire in their mid-60s, and the Internal Revenue Service (IRS) allows you to begin taking distributions from your 401(k) without a 10% early withdrawal penalty as soon as you are 59½ years old. But you still have to pay taxes on your withdrawals.

401(k) Penalty-Free Early Distributions

You may be able to withdraw from your 401(k) without incurring the 10% early distribution penalty in the following circumstances:

• You choose to receive a series of substantially equal payments from your account
• You retire, lose your job, or leave to take a new job when you are 55 or older (or 50 if you are a public safety employee, including federal law enforcement officers, corrections officers, and air traffic controllers, among others); this only applies to the 401(k) from the employer you just left
• A court’s qualified domestic relations order requires that you cash out a 401(k) to split it with your ex-spouse
• You’re a domestic abuse survivor (you can withdraw up to $10,000 or 50% of the account, whichever is less)
• You give birth or adopt a child ($5,000 per child for qualified birth or adoption expenses)
• You have a personal or family emergency for which you can take an emergency distribution of up to $1,000 in a calendar year
• You are terminally ill
• You are or become disabled
• You rolled over the account to another retirement plan within 60 days
• You are deceased and payments were made to your beneficiary or estate after your death
• The money was used to pay an IRS levy
• You have experienced economic loss due to a federally declared disaster
• You have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income (AGI)
• You’re a qualified military reservist called to active duty
• You were automatically enrolled in a 401(k) and you want to get out (within specified time limits), or you made corrective distributions for excess contributions

It’s wise to consult with a tax advisor if you have any questions about whether any withdrawals you make from your 401(k) will involve a penalty as well as taxes.

401(k) Hardship Withdrawals

Under certain circumstances, the IRS allows for what are known as hardship distributions for “an immediate and heavy financial need.” The distribution can only be for the amount required to satisfy that particular financial need, and it must be in compliance with your 401(k) plan terms.

Here are the life events that generally qualify for a hardship withdrawal and that may not be subject to the 10% penalty:

• Medical bills for you, your spouse, or your dependents
• Costs directly related to the purchase of your home (excluding mortgage payments)
• College tuition, related fees, and room and board for the next 12 months for you, your spouse, or your dependents
• Money to avoid eviction or foreclosure on your primary residence
• Funeral expenses for you, your spouse, or your children or dependents
• Certain expenses to repair damage to your home

To qualify for a hardship withdrawal, you must show your plan administrator that you were unable to obtain the needed funds from another source. The distributions are subject to income tax (unless they are Roth contributions; see “Taxes on 401(k) Distributions,” below), and they cannot be repaid into the plan or rolled over into another plan or IRA.

How to Take 401(k) Withdrawals

Depending on your company’s rules, when you retire, you may elect to take regular distributions in the form of an annuity, either for a fixed period or over your anticipated lifetime, or take nonperiodic or lump-sum withdrawals.

When you take withdrawals from your 401(k), the remainder of your account balance continues to be invested according to existing allocations. This means that the length of time over which withdrawals can be taken and the amount of each withdrawal depend on the performance of your investment portfolio.

Taxes on 401(k) Distributions

If you take qualified distributions from a traditional 401(k), all distributions are subject to ordinary income tax. Contributions were deposited from your paycheck before being taxed, deferring the taxation process until the withdrawal date. In other words, when you eventually tap into your 401(k) funds, distributions are treated as taxable earnings for that year, on top of any other money that you make.

On the other hand, if you have a designated Roth account within a 401(k) plan, you have already paid income taxes on your contributions, so withdrawals are not subject to taxation. Roth accounts allow earnings to be distributed tax free as well, as long as the account holder is over age 59½ and has held the account for at least five years.

Keeping Your Money in a 401(k)

Depending on your age, you are not required to take distributions from your account as soon as you retire. While you cannot continue to contribute to a 401(k) held by your former employer, your plan administrator is required to maintain your plan if you have more than $5,000 invested. Anything less than $5,000 will likely trigger a lump-sum distribution.

If you do not need your savings immediately after retirement, then let them continue to earn investment income in the 401(k). As long as your money remains in your 401(k), it is not subject to any taxation.

If your account has $1,000 to $5,000, your company is required to roll over the funds into an IRA if it forces you out of the plan—unless you opt to receive a lump-sum payment or roll over the funds into an IRA of your choice.

Required Minimum Distributions

While you don’t need to start taking distributions from your 401(k) the minute you stop working, you must begin taking required minimum distributions (RMDs) when you turn 73, if you were born in 1951 to 1959, and 75 if you were born in 1960 or later. The age for RMDs had been 72 until Congress passed SECURE 2.0 in December 2022.

If you wait until you are required to take your RMDs, then you must begin withdrawing regular, periodic distributions calculated based on your life expectancy and account balance. While you may withdraw more in any given year, you cannot withdraw less than your RMD.

Converting a 401(k) to an IRA

You cannot contribute to a 401(k) after you leave your job. So, if you want to continue adding money to your tax-advantaged retirement savings, you’ll need to roll over your account(s) into an IRA.

Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a traditional IRA after age 70½; however, the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the law so you can now contribute to a traditional IRA for as long as you like, provided you have earned money.

Keep in mind that you can only contribute earned income, not gross income, to either type of IRA. So this strategy will only work if you have not retired completely and still earn “taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment,” as the IRS puts it. You can’t contribute money from either investments or your Social Security check, though certain types of alimony payments may qualify.

How to Roll Over Funds

To execute a rollover of your 401(k), you can ask your plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself; however, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.

Traditional 401(k) accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401(k) accounts must be rolled over into a Roth IRA.

Traditional IRA and Roth IRA Withdrawals

Like traditional 401(k) distributions, withdrawals from a traditional IRA are subject to your normal income tax rate in the year when you take the distribution.

Withdrawals from Roth IRAs, on the other hand, are entirely tax free if they are taken after you reach age 59½ (or see out a five-year holding period, whichever is later).

However, if you decide to roll over the assets in a traditional 401(k) to a Roth IRA, you will owe income tax on the full amount of the rollover. That’s because with Roth IRAs, you pay taxes upfront (and you haven’t yet paid taxes on contributions made to your 401(k)).

Traditional IRAs are subject to the same RMD regulations as 401(k)s and other employer-sponsored retirement plans; however, there is no RMD requirement for a Roth IRA.

Can I Take All My Money Out of My 401(k) When I Retire?

You are free to empty your 401(k) as soon as you reach age 59½—or 55, in some cases. It’s also possible to cash out earlier, although doing so would trigger a 10% early withdrawal penalty.

What Is a Hardship Withdrawal?

A hardship withdrawal is a withdrawal from your 401(k) for what the IRS calls “an immediate and heavy financial need.” The type of needs that qualify include expenses to prevent eviction or foreclosure from your home, certain medical expenses, the cost of repairs from casualty losses to your principal residence, and burial expenses, among others. To qualify, you must show that you have no other assets or insurance to cover the need. And your 401(k) plan must allow hardship distributions.

What Proof Do You Need for a Hardship Withdrawal?

If your plan permits hardship distributions, you must supply a statement of financial need and have documents (such as estimates, contracts, bills, and statements from third parties) that substantiate it. Depending on the need, documentation might include invoices from a college or a funeral home, hospital bills, bank statements, or court records. The documentation is for tax purposes and usually doesn’t need to be disclosed to your employer or plan sponsor.

How Long Does It Take to Get a 401(k) Distribution?

Times can vary, depending on who administers the account. For a more precise time frame, contact the HR department of the company for which you worked or the financial institution managing the funds.

Can I Just Cash Out My 401(k)?

If you have reached the age of 59½ (or 55 or 50, in certain cases), you can cash out your 401(k). But keep in mind that you have to pay taxes on whatever you withdraw. Depending on the size of your account, you could be facing a huge tax bill, especially since those funds may bump you into a higher tax bracket. Instead of cashing out, another option would be to convert your account into an IRA so that you have a wider range of investment options to keep your money growing until you need it.

What Are My 401(k) Options After Retirement?

Generally speaking, retirees with a 401(k) have the following choices:

• Leave your money in the plan until you reach the age when you start to take required minimum distributions
• Convert the account into an individual retirement account
• Start cashing out via a lump-sum distribution, installment payments, or purchasing an annuity through a recommended insurer

The Bottom Line

Rules controlling 401(k) withdrawals and what you can do with your 401(k) after retirement are very complicated, and shaped by both the IRS and the company that set up the plan. Consult your company’s plan administrator for details. It may also be a good idea to talk to a financial advisor before making any final decisions about your retirement account.

1. Internal Revenue Service. “401(k) Plan Overview.”
2. Internal Revenue Service. “401(k) Resource Guide—Plan Participants—General Distribution Rules.”
3. Congress.gov, U.S. Congress. “H. R. 2617,” Page 831.
4. InCharge Debt Solutions. “Can I Cancel My 401(k) and Cash Out While Still Employed?”
5. Internal Revenue Service. “IRS Reminds Those Aged 73 and Older to Make Required Withdrawals from IRAs and Retirement Plans by Dec. 31; Notes Changes in the Law for 2023.”
6. Internal Revenue Service. “Retirement Topics: Exception to Tax on Early Distributions.”
7. U.S. Senate Committee on Finance. “SECURE 2.0 Act of 2022,” Page 11.
8. Internal Revenue Service. “Retirement Topics—Hardship Distributions.”
9. Internal Revenue Service. “401(k) Plans.”
10. Internal Revenue Service. “Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).”
11. Internal Revenue Service. “Retirement Topics—Termination of Employment.”
12. Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions.”
13. Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs).”
14. Internal Revenue Service. “Retirement Topics—IRA Contribution Limits.”
15. Congress.gov, U.S. Congress. “H.R.1994—Setting Every Community Up for Retirement Enhancement Act of 2019: Text.”
16. Internal Revenue Service. “Topic No. 451, Individual Retirement Arrangements (IRAs).”
17. Internal Revenue Service. “Rollover Chart.”
18. Internal Revenue Service. “Traditional and Roth IRAs.”
19. Internal Revenue Service. “Do’s and Don’ts of Hardship Distributions.”

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Fees and Returns

1. Best Strategies to Maximize Your 401(k)
2. What Return Rate Should I Expect on my 401(k) Returns
3. 401(k) Fees: Everything You Need to Know
4. Best Ways to Use Your 401(k) Without a Penalty
5. Income Limits for 401(k)s: Highly Compensated Employees
6. What to Do After You've Over-Contributed to Your 401(k)
7. Divorce and 401(k): What You Need to Know

Retirement and 401(k)s

1. Average 401(k) Balance by Age
2. What to Do After You Max Out Your Plan
3. How Do 401(k) Catch-Up Contributions Work?
4. How 401(k) Works After Retirement

Other Types of 401(k)s and Retirement Plans

1. Managing Your Own 401(k)
2. What is a Solo 401(k) or Self-Employed 401(k)?
3. SIMPLE 401(k) Plans
4. Small Business 401(k)s: How to Leverage the Muliple Employer DOL Rule
5. Can I Fund a Roth IRA and Contribute to My Employer's Retirement Plan?
6. Must-Know Rules for Converting Your 401(k) to a Roth IRA
7. What Are the Risks of Rolling My 401(k) Into an Annuity

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Vesting is a legal term common to employer-provided benefits that means to give or earn a right to a present or future payment, asset, or benefit.

A Roth 401(k) is an employer-sponsored retirement savings account that is funded with after-tax money. As long as certain conditions are met, withdrawals in retirement are tax-free.

A 401(k) plan is a tax-advantaged retirement account offered by many employers. There are two basic types—traditional and Roth. Here’s how they work.

An IRA transfer is the act of moving funds from an individual retirement account (IRA) to a retirement account, brokerage account, or bank account.

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