If you’re enrolled in a 401(k) plan and you need to get your hands on some money, you may have wondered, when can you withdraw from a 401(k)?
It’s a common question, and there are some important rules to be aware of, as well as tax implications and possible penalties. Read on to find out about the rules for withdrawing from a 401(k).
Key Points
• Withdrawals from a 401(k) can be made penalty-free starting at age 59 1/2.
• Aside from some possible exceptions, early withdrawals before 59 1/2 face a 10% penalty and are taxable.
• The rule of 55 permits penalty-free withdrawals at 55 or older for those who separate from their employer at 55 or older.
• Hardship withdrawals without penalty are available for urgent financial needs for those who qualify, but the withdrawals are subject to income taxes.
• Some 401(k) plans allow for 401(k) loans, which must be repaid in full with interest within five years.
What Are The Rules For Withdrawing From a 401(k)?
Because 401(k) plans are retirement savings plans, there are restrictions on when investors can make withdrawals. Typically, plan participants can withdraw money from their 401(k) without penalty when they reach the age of 59 ½. These are called qualified distributions. But if an individual takes out funds before that age, they may face penalties.
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At What Age Can You Withdraw From a 401(k) Without Penalty?
There are certain circumstances in which people can take an early withdrawal from their 401(k) without penalty before age 59 ½.
Under the Age of 55
If a 401(k) plan participant is under the age of 55 and still employed at the company that sponsors their plan, they have two options for withdrawing from their 401(k) penalty-free:
1. Taking out a 401(k) loan.
2. Taking out a 401(k) hardship withdrawal.
If they’re no longer employed at the company that sponsors their 401(k), individuals might choose to roll their funds into a new employer’s 401(k) plan or do an IRA rollover.
Between Ages 55–59 1/2
The IRS provision known as the rule of 55 allows account holders to take withdrawals from their 401(k) without penalty if they’re age 55 or older and leave or lose their job at age 55 or older. However, they must still pay taxes on the money they withdraw.
There are a few guidelines to consider regarding the rule of 55:
• A 401(k) plan must permit early withdrawals before age 59 ½ for individuals to take advantage of the rule of 55.
• The withdrawals must be from the 401(k) the person was contributing to at the time they left their job, and not a previous employer’s 401(k).
• The rest of the funds must remain in the 401(k) until the individual reaches age 59 ½.
• If someone rolls their 401(k) plan into an individual retirement account (IRA) such as a traditional IRA, the rule of 55 no longer applies.
After Age 73
In addition to penalties for withdrawing funds too soon, you may also face penalties if you take money out of a retirement plan too late. When you turn 73 (as long as you turned 72 after December 31, 2022), you must withdraw a certain amount of money every year, known as a required minimum distribution (RMD). If you don’t, you’ll face a penalty of up to 25% of that distribution.
The RMD amount you need to take is based on a specific IRS calculation that generally involves dividing the account balance of your 401(k) at the end of the prior year with your “life expectancy factor,” which you can find more about on the IRS website.
Withdrawing 401(k) Funds When Already Retired
If a 401(k) plan holder is retired and still has funds in their 401(k) account, they can withdraw them penalty-free at age 59 ½. The same age rules apply to retirees who rolled their 401(k) funds into an IRA.
Withdrawing 401(k) Funds While Still Employed
If a 401(k) plan holder is still employed, they can access the funds from a 401(k) account with a previous employer once they turn 59 ½. However, they may not have access to their 401(k) funds at the company where they currently work.
401(k) Hardship Withdrawals
Under certain circumstances, some 401(k) plans allow for hardship distributions. If your plan does, the criteria for eligibility should appear in the plan documents.
Hardship distributions are typically offered penalty-free in the case of an “immediate and heavy financial need,” and the amount withdrawn cannot be more than what’s necessary to meet that need. The IRS has designated certain situations that can qualify for hardship distributions, including:
• Medical expenses for the employee or their spouse, children, or beneficiary
• Cost related to purchasing a principal residence (aside from mortgage payments)
• Tuition and related educational expenses
• Preventing eviction or foreclosure on a primary residence
• Funeral costs for the employee or their spouse, children, or beneficiary
• Certain repair expenses for damage to the employee’s principal residence
Hardship distributions are typically subject to income taxes.
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Taking Out a 401(k) Loan
Some retirement plans allow participants to take loans from their 401(k). The amount an individual can borrow from an eligible plan is capped at 50% of their vested account balance or $50,000 — whichever is less.
The borrower has to pay the money back plus interest, usually within five years. As long as they repay the money on time, they won’t have to pay taxes or penalties on a 401(k) loan. However, if a borrower can’t repay the loan, that’s considered a loan default and they will owe taxes and a 10% penalty on the outstanding balance if they are under age 59 ½.
IRA Rollover Bridge Loan
If you need money for a short period of time and you also happen to be doing an IRA rollover, you may be able to use that money as a loan — provided that you follow the 60-day rule. In short, the 60-day rollover rule requires that all funds withdrawn from a retirement plan be deposited into a new retirement plan within 60 days of distribution, Thus, within that 60-day window, you could potentially use the money you’re rolling over as a “bridge” loan.
401(k) Withdrawals vs Loans
While it’s generally wise to keep your retirement funds in your 401(k) for as long as possible to keep saving for your future, withdrawals and loans are possible if you need money. If you find yourself considering a 401(k) withdrawal vs. a loan, be sure to weigh the choices carefully. You’ll need to repay a loan plus interest within five years, and with an early withdrawal, you’ll either need to qualify for a hardship withdrawal and then pay income taxes on the withdrawal, or if you’re age 55, you may be able to take advantage of the rule of 55.
Cashing Out a 401(k)
Cashing out a 401(k) occurs when a participant liquidates their account. While it might sound appealing, particularly if an individual needs money right now and has no other options, cashing out a 401(k) has drawbacks. For example, if they are younger than 59 ½, the cashed-out funds will be subject to income taxes and an additional 10% penalty. That means a significant portion of their 401(k) withdrawal might be paid in taxes.
Rolling Over a 401(k)
If you’re leaving your job you may choose to roll over your 401(k) to continue saving for retirement.
This strategy allows you to roll the money into an IRA that you open and manage yourself by choosing investments — which may be things like stocks, mutual funds, and exchange-traded funds (ETFs) — and you won’t have to pay taxes or early withdrawal penalties.
With an IRA rollover, you might have a wider range of investment options than with an employer-sponsored plan (think of it as a kind of self-directed investing), and your money has a chance to potentially continue to grow tax-deferred.
The Takeaway
While it may be possible to withdraw money from a 401(k), certain factors like age and hardship distribution eligibility determine whether you can make a withdrawal without incurring taxes and penalties. You might also consider a 401(k) loan, but you’ll need to repay the money you borrow plus interest within five years.
If you are leaving or changing your job, you could opt to roll over your 401(k) into an IRA to continue saving for retirement. With a rollover, you won’t pay penalties or taxes.
Review your options carefully to decide the best course for your situation.
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FAQ
Can you take out 401(k) funds if you only need the money short term?
It’s possible to take out 401(k) funds if you only need the money short term. For example, you could take out a 401(k) loan if your plan allows it. There are limits on how much you can take out, however, and you need to repay the amount you borrow plus interest within five years. Just be sure you can repay the loan so it doesn’t go into default.
How long does it take to cash out a 401(k) after leaving a job?
The length of time it takes to cash out a 401(k) after leaving a job depends on your employer and the company that administers your 401(k) plan. The process generally takes anywhere from a few days to a few weeks.
What are other alternatives to taking an early 401(k) withdrawal?
One alternative to taking an early 401(k) withdrawal is to take out a 401(k) loan instead. You will need to repay the amount you borrow plus interest within five years. As long as you do that, you won’t owe taxes on the money you borrow with a 401(k) loan.
At what age can I withdraw from my 401(k) without penalty?
You can withdraw from your 401(k) without penalty at age 59 ½. However, if you are 55 or older, and you leave or lose your job in the same calendar year that you’re 55 or older, you may be able to take out money without taxes or penalties if your 401(k) plan allows it. This is thanks to a provision called the rule of 55.
When can I access my 401(k) funds if I’m already retired?
If you are already retired, you can access your 401(k) funds anytime you like as long as you are at least 59 ½ years old. Just remember that you will owe income tax on the money you withdraw, so plan accordingly.
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