When can you withdraw from a 401k?

Retirement accounts such as 401(k) help workers invest part of their paycheck for their golden years. The money contributed to a 401(k) is meant for retirement, and this is why the IRS makes it difficult for retirement savers to access their money before attaining the full retirement age. Usually, the younger you are, the fewer options you have to access your 401(k) money, but this changes when you reach the required retirement age.

Once you are 59 ½, you can take a 401(k) withdrawal without paying an early withdrawal penalty. However, you will still be required to pay taxes on the 401(k) withdrawal. If you are below 59 ½, you may be able to withdraw from your 401(k), but you may incur an early withdrawal penalty. An exemption to this requirement is if you leave your job when you reach age 55, when you may qualify to make a penalty-free withdrawal.

Withdrawing from 401(k) before Age 55

If you are younger than 55 and still work for your employer, you have two options to access your retirement savings. If your employer allows 401(k) loans, you may be allowed to borrow against your retirement savings to meet emergency financial needs or pay for college education. An alternative to 401(k) loans is a hardship withdrawal, which involves withdrawing money for immediate financial needs such as medical expenses, funeral expenses, or to prevent foreclosure on your primary residence.

If you lost your job and you need money for a financial emergency, you could consider taking a withdrawal from your 401(k) account. However, withdrawing 401(k) money should be your last resort since this decision could have a huge impact on your retirement. Early withdrawals are taxed as income and you could pay an additional 10% penalty for early withdrawals. Depending on why you are withdrawing retirement money prematurely, you may be exempted from the 10% early withdrawal penalty.

Withdrawing from 401(k) between Age 55 and 59 ½

If you take a distribution before attaining age 59 ½, you could be required to pay income taxes and a penalty on the distribution. However, an exemption to this IRS requirement is when you quit your job at 55. This exemption is known as the rule of 55, and it allows participants to avoid paying the 10% penalty tax when they leave their employer at age 55. This rule does not apply if you are still working for the employer managing your 401(k) account.

You can take a penalty-free distribution if you are laid off, fired, or you resign from your job in the year when you attain age 55. If you quit at age 54 and wait until you are 55 to start taking withdrawals, you will still owe a penalty tax on the withdrawn amount. Additionally, if you rollover your 401(k) to an IRA, the rule of 55 does not apply. You will have to wait until you are 59 ½ to take a penalty-free withdrawal from an IRA.

Withdrawing from 401(k) After Age 59 ½

Once you are 59 ½, you may access your 401(k) money tax-free depending on the following two conditions: 

You are working

If you decide to continue working after attaining age 59 ½, you cannot take a penalty-free distribution from the 401(k) plan of the company you currently work for. Some employers may allow in-service distributions if you are still working for the company, but you should check with the plan administrator to know if this is an option for you. However, if you have old 401(k)s left with former employers, you can start taking penalty-free withdrawals when you turn 59 ½.

You are retired

If you decide to retire when you reach 59 ½, you can take penalty-free distributions from the 401(k) account. If you have multiple 401(k) accounts, you can rollover the 401(k)s into an IRA to consolidate the retirement money. You can continue taking distributions from the IRA without paying any penalties.

Taking Required Minimum Distributions after 72

Once you reach age 72, you must start taking the required minimum distributions (RMD) from the 401(k) account. You must begin taking RMDs by April 1 of the year after your turn 72 (or 70 ½ if you attained 70 ½ before or on January 1, 2020). The amount of distributions depend on your life expectancy.

There is an exemption to the required minimum distributions if you are still in active employment. If you are still working for the employer that manages your 401(k), you may be exempted from taking the mandatory distributions unless you own more than 5% of the company. You cannot qualify for the exemption if you own the company.