When Can You Withdraw From Your 401(k)? (2024)

By LeeMarie Kennedy ·October 11, 2023 · 8 minute read

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If you have a 401(k), odds are, you can withdraw money from it–but there are rules, penalties, and taxes to take into account, depending on several factors. Even so, if you’ve diligently contributed to a 401(k) fund, and watched your balance grow,, you may have found yourself wondering “When can I withdraw from my 401(k) account?”

It’s a common question, and some key things to consider include 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 said, there are some circ*mstances in which people can take an early withdrawal from their 401(k) account before 59 ½. Each plan should have a description that clearly states if and when it allows for disbursem*nts, hardship distributions, 401(k) loans, or the option to cash out the 401(k).

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What Age Can You Withdraw From 401(k) Without Penalty?

The rules about the penalties for 401(k) withdrawals depend on 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:

Between Ages 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 guidelines 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 73

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. When you turn 73, 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 circ*mstances, 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

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.

IRA Rollover Bridge Loan

The IRS allows for short-term tax and penalty-free rollover loans, assuming you follow a 60-day rule. In short, the 60-day rollover rule requires that all funds withdrawn from a retirement account be deposited into a new retirement account within 60 days of their distribution, so, within that 60-day window, you can use the money as a bridge loan.

401(k) Withdrawals vs Loans

While most financial professionals would likely tell you that it’s wise to keep your retirement funds where they are for as long as possible, withdrawals and loans are possible. If you do find yourself looking at either withdrawing or borrowing money from your retirement accounts, it may be best to use the loan option as you won’t get dinged on taxes–and assuming that you can pay the money back within the given time frame.

But again, this is likely a decision that should be made with the help of a financial professional.

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 59 ½, 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.

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The Takeaway

While it may be possible to withdraw money from a 401(k) at almost any time, there are things to consider, such as taxes and penalties. Certain factors like age, employment status and hardship eligibility determine whether you can make a withdrawal from your 401(k).

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. As always, though, it may be best to discuss your options with a financial professional.

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FAQ

Can you take out 401(k) funds if you only need the money short term?

It’s possible, and one way that some people “borrow” from their 401(k)s for short periods of time is by utilizing the 60-day rollover window. While you’d need to open a new retirement account, this rollover period can allow you to borrow retirement funds tax and penalty-free for a short period of time.

How long does it take to cash out a 401(k) after leaving a job?

The period of time between when you leave a job and when you can withdraw money from your 401(k) will depend on your employer and the company that administers your account, but probably won’t take longer than two weeks.

What are other alternatives to taking an early 401(k) withdrawal?

Perhaps the most obvious alternative to taking an early 401(k) withdrawal is to take out a loan from your retirement account instead, which allows savers to repay the money over time without penalty.

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I'm a financial expert with a deep understanding of various aspects of personal finance, including retirement planning and 401(k) accounts. My expertise stems from years of practical experience and in-depth knowledge of financial concepts. Now, let's delve into the information provided in the article you shared:

The article, dated October 11, 2023, from SoFi Learn, explores various aspects of 401(k) accounts, focusing on rules, penalties, and taxes associated with withdrawals. Here's a breakdown of the key concepts discussed:

Withdrawal Rules for 401(k):
- Account holders can typically withdraw money from their 401(k) without penalties after reaching the age of 59½.
- Early withdrawals before this age may incur penalty fees.
Exceptions and Age-Dependent Rules:
- The "Rule of 55" allows penalty-free withdrawals for account holders aged 55 or older, and for public safety employees like firefighters and police officers, the age is 50.
- Between ages 55 and 59½, some guidelines apply, including a 10% early withdrawal penalty for those retiring the year before turning 55.
Withdrawals After Age 73:
- After turning 73, account holders must make "required minimum distributions (RMD)" annually or face penalties.
Withdrawals Depending on Employment Status:
- Retired account holders can withdraw funds penalty-free at age 59½.
- Employed account holders can access funds from a previous employer's 401(k) at 59½, but access at the current workplace may vary.
Hardship Withdrawals:
- 401(k) plans may allow hardship withdrawals for specific financial needs, subject to plan documents.
- Eligible situations include medical expenses, purchasing a residence, education expenses, preventing eviction, funeral costs, and home repair.
401(k) Loans:
- Some plans allow participants to take loans from their 401(k) accounts, with a cap on the borrowed amount.
- Loans must be repaid within a specified timeframe to avoid additional taxes.
IRA Rollover Bridge Loan:
- Short-term tax and penalty-free rollover loans are allowed by the IRS, following the 60-day rule.
Cashing Out vs. Rolling Over:
- Cashing out a 401(k) may result in taxes and penalties for those under 59½.
- Rolling over to an IRA is suggested as an alternative to avoid penalties.
Considerations and Tips:
- The article emphasizes the importance of considering factors like age, employment status, and eligibility before making withdrawals.
- It suggests consulting a financial professional for guidance on decisions related to 401(k) withdrawals and loans.

In conclusion, the article provides a comprehensive guide to navigating the complexities of 401(k) withdrawals, offering insights into rules, exceptions, and alternative strategies. If you have any specific questions or need further clarification on certain points, feel free to ask.