OVERVIEW
- Distributions from a 401k generally start without the 10% early withdrawal penalty once you reach age 59½.
- Roth 401k withdrawals typically require you to be at least 59½ and to have held the account for at least five years.
- Early withdrawals usually face a 10% additional tax plus income tax on taxable amounts, unless an exception applies.
- Traditional 401k qualified distributions are taxed as ordinary income, while Roth 401k qualified distributions are tax-free.
- Employee contributions are always 100% vested but usually unavailable until a “distributable event” such as reaching age 59½, hardship, or leaving your employer. Employer contributions follow the plan’s vesting schedule, which may be up to a three-year cliff or six-year graded schedule.
- Most 401k accounts have required minimum distributions (RMDs) beginning at age 73. However, beginning in 2024, designated Roth 401k accounts are not subject to lifetime RMDs.
Planning for retirement involves more than just saving money. Knowing when and how you can access your 401k can help you avoid costly mistakes.
This guide explains the key rules for making withdrawals and the penalties for taking money out too soon. If you want to understand how to access your 401k without triggering extra taxes or penalties, keep reading.
The Carry Guide to Paying Less in Taxes
A complete guide to the biggest tax-saving strategies for US business owners, freelancers, self-employed individuals, and side hustlers.
When Can You Withdraw From a 401k?
You can usually take money from your 401k without penalties once you reach age 59½. Withdrawals made before that age are generally subject to a 10% additional tax plus income tax on the taxable portion, unless an exception under Internal Revenue Code Section 72(t) applies.
✏️ Hypothetical Example:
An early taxable withdrawal of $10,000 before age 59½ would typically trigger a $1,000 (10%) additional tax plus income tax. The income tax amount depends on your tax bracket for that year.
If you have a Roth 401k, one more rule applies. Your first contribution must have been made at least five years ago. Even if you’re over age 59½, a qualified distribution isn’t allowed without penalties if the account is under five years old. This is often called the “five-year rule,” and it applies to other Roth accounts such as Roth IRAs.
📝 Note: Some plans may have their own restrictions or require paperwork for withdrawals, even if you meet the age or time requirements.
📌 Also read: Roth 401k Withdrawal Rules
Required Minimum Distributions (RMDs)
Reaching age 59½ simply means you can withdraw from your 401k without a penalty, but it does not require you to start taking money out. Required minimum distributions (RMDs) begin at age 73 for most 401k accounts.
Once you reach age 73, you must start withdrawing a set minimum amount from your 401k each year. If you fail to take the required amount, the IRS imposes an excise tax of 25%. This tax may be reduced to 10% if the mistake is corrected in a timely manner.
Starting in 2024, designated Roth 401k accounts are no longer subject to lifetime RMDs.
📝 Tip: Use the IRS RMD table to calculate the exact amount you need to withdraw each year.
Employer Contributions Must Be Vested
Many employers offer matching contributions, which add extra money to your 401k based on your salary. For example, if your employer matches dollar for dollar up to 5% of your pay and you earn $100,000 a year, you could receive up to $5,000 in employer contributions annually.
Employee elective deferrals (the money you contribute yourself) are always 100% vested. Employer contributions, however, follow the plan’s vesting schedule. This schedule may be immediate, a three-year cliff, or a six-year graded schedule.
📝 Note: To keep employer contributions when you withdraw, the funds must be vested. Your ability to withdraw also depends on the plan’s distribution rules, such as reaching age 59½ or leaving your job.
📌 Also read: What is the Average 401k Employer Match?
Do You Have to Pay Taxes on Withdrawals?
How your 401k withdrawals are taxed depends on the type of account you have.
✅ Traditional 401k: Contributions are made with pre-tax dollars, and employer contributions are also pre-tax. Qualified withdrawals in retirement are typically taxed as ordinary income because taxes were deferred when you contributed.
✅ Roth 401k: Contributions are made with after-tax dollars. Qualified withdrawals are tax-free if you’re at least age 59½ and your account has been open for at least five years.
Solo 401k Early Withdrawal Calculator
Need to calculate how much you’ll receive when taking an early Solo401k Withdrawal? Our calculator helps determine the financial implications of an early withdrawal from a Solo 401k plan, including potential penalties, taxes, and the total amount they’ll receive.
Exceptions to the Early Withdrawal 10% Penalty
The IRS allows certain penalty-free early 401k withdrawals before age 59½ if specific conditions apply.
Situations That Qualify for a Penalty Exception on a 401k
✅ You become disabled or pass away.
✅ You leave your job in or after the year you turn 55 (often called the “Rule of 55”).
✅ Certain unreimbursed medical expenses that exceed the applicable income threshold.
📝 Important Notes:
- Funeral costs may qualify for a hardship withdrawal if your plan allows it, but they are not an exception to the 10% early-distribution tax under Internal Revenue Code Section 72(t). Hardship withdrawals remain taxable and may still be subject to the 10% additional tax unless another exception applies.
- Some penalty exceptions (such as using funds for higher education, health insurance premiums after 12 weeks of unemployment, or first-home purchases up to $10,000) apply to IRAs but not to 401k plans.
- Plans may allow hardship withdrawals for serious needs (e.g., preventing eviction or foreclosure). However, the 10% penalty can still apply, unless another Section 72(t) exception is met.
📌 Also read: How to Fix Overcontributions to a 401k
401k Loans
Taking out a 401k loan can be an alternative to making an early withdrawal if your plan allows it. Not all 401k plans offer loans, but if they do, the IRS permits borrowing up to 50% of your vested account balance, with a maximum of $50,000. Repayment is typically five years, or up to 15 years if the loan is for purchasing a primary residence. Interest rates are usually set at the Prime Rate plus one or two percentage points.
A 401k loan works similarly to a Solo 401k loan. It can be a better option than withdrawing money and paying the 10% penalty, but it still interrupts your tax-advantaged compounding and reduces your invested balance.
Advantages of a 401k Loan
✅ No credit check and nothing appears on your credit report.
✅ Freedom to use the money for any purpose.
✅ Interest rates are typically lower than other loan options.
✅ Late or missed payments do not affect your credit score.
Disadvantages of a 401k loan
❌ You’re depleting your retirement account of funds that would otherwise grow through compounding.
❌ If you leave your employer or are terminated and your loan is offset, you can generally roll over the offset amount by your tax filing deadline (including extensions) to avoid taxation.
❌ Failure to repay the loan under Internal Revenue Code Section 72(p) results in a deemed distribution, which is taxable and may be subject to the 10% additional tax if you’re under 59½.
❌ Plans may allow ongoing contributions while a loan is outstanding, but this depends on plan terms rather than an IRS rule.
Can You Withdraw Everything at Once When You Retire?
Yes, you can generally decide how much and how often to withdraw from your 401k once you retire, as long as you follow your plan’s rules and meet any required minimum distributions (RMDs) for accounts subject to them.
With a Roth 401k, qualified withdrawals are tax-free. Non-qualified portions, such as earnings, may still be taxable. Starting in 2024, Roth 401k accounts are no longer subject to lifetime RMDs.
With a Traditional 401k, every withdrawal is taxed as ordinary income. This means planning your withdrawals is especially important. The taxes you owe depend on your tax bracket and rates at the time of distribution. Many retirees find it helpful to withdraw amounts based on how much tax they expect to owe each year instead of taking large lump sums.
Key Takeaways
Knowing how 401k withdrawals work makes it easier to plan ahead. The age you take money out, the type of account you have, and how your employer contributions vest can all affect taxes, penalties, and how much you actually receive.
If you’re nearing retirement or thinking about an early withdrawal, take time to review your plan’s rules, check the latest IRS guidelines, and look at how any withdrawal fits into your tax situation. Doing this can give you a clearer picture of your options and help you manage your retirement savings more effectively.
Disclaimer:
The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.
The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.