If you’re the kind of take-charge retirement planner who’s diligently contributing to a 401(k) fund, receiving matching contributions from your employer, and watching your savings start to stack, you might find yourself wondering “When can I withdraw from my 401(k) account?”
The answer depends on a number of factors including your age, whether you’re still working or already retired, if you qualify for a hardship withdrawal, whether it makes sense to take out a 401(k) loan, or rollover your 401(k) into another account.
What Are The Rules For Withdrawing From a 401(k)?
Because 401(k) accounts are retirement savings vehicles, there are restrictions on exactly when investors can withdraw 401(k) funds. Typically, account holders can withdraw money from their 401(k) without penalties when they reach the age of 59½. If they decide to take out funds before that age, they may face penalty fees for early withdrawal.
That being said, there are some circumstances in which people can reach into their 401(k) account before 59½. Each plan should have a description that clearly states if and when it allows for disbursements, hardship distributions, 401(k) loans, or the option to cash out the 401(k).
What Age Can You Withdraw From 401(k) Without Penalty?
The rules about the penalties for 401(k) withdrawals depend on your age, with younger workers generally facing higher penalties for withdrawals, especially if they’re not yet retired.
The IRS provision known as the “Rule of 55” allows account holders to withdraw from their 401(k) or 403(b) without any penalties if they’re 55 or older and leaving their job in the same calendar year.
In the case of public safety employees like firefighters and police officers, the age to withdraw penalty-free under the same provision is 50.
Under the Age of 55
When 401(k) account holders are 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) without penalties:
1. Taking out a 401(k) loan.
2. Taking out a 401(k) hardship withdrawal.
If they’re no longer employed at the company, account holders can roll their funds into a new employer’s 401(k) plan or possibly an IRA.
Between Age 55–59 1/2
The Rule of 55, as previously mentioned, means that most 401(k) plans allow for penalty-free retirements starting at age 55, with the exception of public service officials who are eligible as early as 50. Still, there are a few rules to consider around this particular IRS provision:
1. Account holders who retire the year before they turn 55 are subject to a 10% early withdrawal penalty tax.
2. If account holders roll their 401(k) plans over into an IRA account, the provision no longer applies. A traditional IRA account holder cannot withdraw funds penalty-free until they are 59 ½.
3. Once a 401(k) account holder reaches 59 ½, access to their funds depends on whether they are retired or still employed.
After Age 72
In addition to penalties for withdrawing funds too soon, you can also face penalties if you take money out of a retirement plan too late. After age 72, you must withdraw a certain amount, known as a “required minimum distribution (RMD),” every year, or face a penalty of up to 50% of that distribution.
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, 401(k) plans allow for hardship withdrawals or early distributions. If a plan allows for this, the criteria for eligibility should appear in plan documents.
Hardship distributions are typically only offered penalty-free in the case of an “immediate and heavy financial need,” and the amount disbursed is not more than what’s necessary to meet that need. The IRS has designated certain situations that can qualify for hardship distributions, including:
• Certain medical expenses
• Purchasing a principal residence
• Tuition and educational expenses
• Preventing eviction or foreclosure on a primary residence
• Funeral costs
• Repair expenses for damage to a principal place of residence
The terms of the plan govern the specific amounts eligible for hardship distributions. In some cases, account holders who take hardship distributions may not be able to contribute to their 401(k) account for six months.
As far as penalties go, hardship distributions may be included in the account holder’s gross income at tax time, which could affect their tax bill. And if they’re not yet 59 ½, their distribution may be subject to an additional 10% tax penalty for early withdrawal.
Taking Out a 401(k) Loan
Some retirement plans allow participants to take loans directly from their 401(k) account. If the borrower fulfills the terms of the loan and pays the money back in the agreed upon timeframe (usually within five years), they do not have to pay additional taxes on it.
That said, the IRS caps the amount someone can borrow from an eligible plan at either $50,000, or half of the amount they have saved in their 401(k)—whichever is less. Also, borrowers will likely pay an interest rate that’s one or two points higher than the prime.
Coronavirus-related 401(k) Loans and Withdrawals
While the Coronavirus Aid, Relief, and Economic Security (CARES) Act offered special withdrawal allowances for 401(k) plan holders in 2020, most of the early withdrawal penalties have returned in 2021.
However, the CARES Act has expanded a relief provision into 2021 that allows 401(k) plan holders who meet qualified disaster requirements to borrow up to $100,000 from their 401(k) account (up from $50,000 in 2019) in a 401(k) loan and defer those loan payments for a year. In 2020, a third of Americans with retirement savings dipped into them during the crisis.
Additionally, the COVID-Related Tax Relief Act , passed in December 2020, allows 401(k) account holders to make relief withdrawals if they are taxpayers in a qualified disaster area and have suffered a financial loss due to that disaster.
Cashing Out a 401(k)
Cashing out an old 401(k) occurs when a participant liquidates their account. While it might sound appealing, particularly if a plan holder needs money right now, cashing out a 401(k) can have some drawbacks. If the plan holder is younger than 59½, the withdrawn funds will be subject to ordinary income taxes and an additional 10% penalty tax. That means that a significant portion of their 401(k) would go directly to the IRS.
Rolling Over a 401(k)
Instead of cashing out an old 401(k), account holders may choose to roll over their 401(k) into a different retirement account, like an IRA. In many cases, this strategy allows participants to continue saving for retirement, avoid unnecessary penalty fees, and reduce their total number of retirement accounts.
The Takeaway
Certain factors like age, employment status and hardship eligibility determine whether you can make a withdrawal from your 401(k). The CARES Act and other legislation provides some early 401(k) withdrawal relief and a little wiggle room for taxpayers in qualifying disaster areas.
In cases where plan participants do not meet age requirements for withdrawing 401(k) funds penalty-free, they can still take out a 401(k) loan, cash out a pre-existing 401(k) plan, or rollover their 401(k) into a different retirement account.
SoFi Invest® is a simple way to rollover your 401(k) into an IRA. You can take control of your retirement savings with SoFi’s active or automated Traditional, Roth, and SEP IRAs, plus you can access real human advisors who’ll help you every step of the way.
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