Yes, you can withdraw from a 401(k), but the rules depend on your age, your reason, and whether you still work at the company that sponsors the plan

You can withdraw money from your 401(k) while you are still employed, after you leave a job, or after you reach retirement age. The catch is that withdrawals before age 59½ usually trigger a 10 percent early withdrawal penalty on top of income tax, unless you meet a specific exception. After 59½, you can withdraw without the penalty, though you still owe income tax on the money. At age 73, the IRS requires you to take minimum withdrawals each year, whether you need the money or not.

The rules are different depending on when you take the money and why. Some withdrawals are penalized; some are not. Some are optional; some are mandatory. Understanding which category your situation falls into determines what you actually owe and when.

Key Takeaways

  • Withdrawals before age 59½ are subject to a 10 percent penalty plus income tax unless you meet an exception such as disability, medical hardship, or separation from service after age 55.
  • After age 59½, you can withdraw any amount without the 10 percent penalty, though you still pay income tax on the withdrawal.
  • Starting at age 73, you must take a required minimum distribution (RMD) each year based on your age and account balance, or face a 25 percent penalty on the amount you failed to withdraw.
  • Some plans allow loans or hardship withdrawals while you are still employed, but these have strict rules about what counts as a hardship and how much you can borrow.
  • Withdrawals are reported to the IRS on Form 1099-R, and your employer withholds federal income tax automatically unless you choose otherwise.

Withdrawals before age 59½ and the 10 percent penalty

If you withdraw money from your 401(k) before you turn 59½, the IRS charges a 10 percent early withdrawal penalty on top of the regular income tax you owe. This means a $10,000 withdrawal costs you $1,000 in penalty alone, plus whatever your tax bracket adds on top.

However, the penalty does not explore if you meet one of the IRS exceptions. The most common exceptions are: you are disabled; you are withdrawing to pay unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income; you are separated from service (left your job) and you are age 55 or older; you are taking substantially equal periodic payments under a specific IRS formula; or you are withdrawing to pay a may have access to domestic relations order (QDRO) related to divorce. Some plans also allow withdrawals for financial hardship while you are still employed, though the definition of hardship is narrow and varies by plan.

If none of these exceptions explore to your situation, the 10 percent penalty will be deducted from your withdrawal along with income tax.

Withdrawals after age 59½ with no penalty

Once you reach age 59½, you can withdraw money from your 401(k) without the 10 percent early withdrawal penalty. You still owe federal income tax on the full amount withdrawn, and your employer will withhold a percentage automatically (usually 20 percent unless you request a different amount). You also owe state income tax in most states.

There is no limit on how much you can withdraw after 59½, and you can withdraw as much or as little as you want, whenever you want. Some people withdraw everything at once; others take regular monthly or annual amounts. The choice is yours, as long as you eventually withdraw everything by the time you reach age 73, when required minimum distributions begin.

Required minimum distributions starting at age 73

The IRS requires you to start taking money out of your 401(k) at age 73. The amount you must withdraw each year is calculated by dividing your account balance on December 31 of the previous year by a life expectancy factor published by the IRS. The exact amount depends on your age and your account balance, so it varies from person to person and year to year.

If you do not take your required minimum distribution (RMD) by December 31, the IRS charges a penalty of 25 percent on the amount you failed to withdraw. This penalty was reduced from 50 percent in 2023. If you are still working and your plan allows it, you may be able to delay RMDs until you actually retire, but this exception does not explore to IRAs or to 401(k)s at companies where you no longer work.

You can withdraw more than your RMD in any year, and the excess counts toward future years' requirements. Many people work with a tax professional or use their plan's calculator to figure out the exact amount they need to withdraw each year.

Loans and hardship withdrawals while still employed

Some 401(k) plans allow you to borrow money from your own account while you are still working. A 401(k) loan is not a withdrawal — you borrow the money and repay it with interest, and the money stays in your account. The interest rate is typically the prime rate plus 1 percent, set by your plan administrator. You usually have five years to repay the loan, though some plans allow longer repayment periods if the loan is for a home purchase.

If you leave your job while you have an outstanding loan, you typically must repay the full balance within 60 to 90 days, depending on your plan. If you do not repay it in time, the loan is treated as a withdrawal, which means you owe the 10 percent penalty (if you are under 59½) plus income tax on the outstanding balance.

Hardship withdrawals are actual withdrawals, not loans. Your plan must allow them, and you must meet your plan's definition of hardship. Common hardships include medical expenses, home purchase, education expenses, or preventing eviction or foreclosure. The IRS does not define hardship — each plan sets its own rules. You typically must show that you have no other way to pay for the expense, and you may be required to suspend your contributions for a period of time after the withdrawal.

Tax withholding and what you owe at tax time

When you withdraw money from your 401(k), your employer withholds federal income tax automatically. The default withholding is 20 percent for most withdrawals, though you can request a different amount on Form W-4P. This withholding is sent to the IRS on your behalf.

The withholding is not the same as the tax you actually owe. If you are in a higher tax bracket, you may owe more than 20 percent, and the shortfall is due when you file your tax return. If you are in a lower bracket or have other deductions, you may have withheld too much, and you will receive a refund. You are responsible for making sure enough tax is withheld to cover what you actually owe.

If you withdraw money and do not want federal withholding, you can request that no tax be withheld, but this is rarely a good idea because you will owe the full tax bill at tax time. Some people choose to have extra tax withheld if they know they will owe more than 20 percent.

Rollovers and transfers to avoid taxes

If you leave your job or retire, you can move your 401(k) balance to an IRA or to a new employer's 401(k) plan without paying tax or penalty. This is called a rollover. Your old plan administrator can transfer the money directly to the new account (a direct rollover), which is the cleanest option and avoids withholding.

If you receive a check from your old plan instead of a direct transfer, you have 60 days to deposit it into an IRA or new 401(k). If you miss the 60-day important date, the full amount is treated as a taxable withdrawal, and you owe income tax plus the 10 percent penalty if you are under 59½. Your old plan will withhold 20 percent automatically, so you need to come up with the withheld amount from your own pocket to deposit the full balance within 60 days.

A rollover is useful if you want to consolidate multiple 401(k)s, move to an IRA with lower fees, or keep money in a 401(k) to delay RMDs if you are still working. The rules are strict, so it is worth understanding the difference between a direct rollover (safest) and an indirect rollover (riskier) before you move money.

What happens if you need money before 59½

If you are under 59½ and you need to withdraw money, your options are limited. You can take a withdrawal and pay the 10 percent penalty plus income tax, unless you meet one of the exceptions. You can take a loan from your plan if it allows loans. You can wait until you separate from service and reach age 55, which removes the penalty. Or you can explore whether your plan allows hardship withdrawals for your specific situation.

Some people roll their 401(k) into an IRA and then use the "Rule of 55" or "SEPP" (Substantially Equal Periodic Payments) strategy to withdraw money without the 10 percent penalty, though these strategies have specific rules and are not right for everyone. A tax professional can help you understand whether any of these options make sense for your situation.

Frequently Asked Questions

What is the 10 percent early withdrawal penalty, and can I avoid it?

The 10 percent early withdrawal penalty is a tax charged by the IRS on withdrawals before age 59½. You can avoid it if you meet an exception, such as disability, medical hardship, separation from service after age 55, or substantially equal periodic payments. If you do not meet an exception, the penalty applies on top of income tax.

Do I have to pay taxes on a 401(k) withdrawal?

Yes, you owe federal income tax on every withdrawal from a traditional 401(k), regardless of your age. Your employer withholds 20 percent automatically, but you may owe more or less depending on your total income and tax bracket. You also owe state income tax in most states. Roth 401(k) withdrawals are tax-free if you meet certain conditions.

What is the difference between a 401(k) loan and a hardship withdrawal?

A loan is borrowed money that you repay with interest; it stays in your account and is not taxed. A hardship withdrawal is an actual withdrawal that you keep; you owe income tax and possibly the 10 percent penalty. Loans must be repaid if you leave your job, but hardship withdrawals do not have to be repaid.

Can I withdraw my 401(k) if I still work at the company?

It depends on your plan. Most plans allow withdrawals after age 59½ even if you are still employed. Some plans allow loans or hardship withdrawals while you are employed. A few plans allow "in-service distributions" at any age. Check your plan documents or ask your plan administrator what is allowed.

What happens if I do not take my required minimum distribution?

If you miss your required minimum distribution at age 73 or later, the IRS charges a 25 percent penalty on the amount you failed to withdraw. This is one of the highest penalties the IRS assesses. You can withdraw more than your RMD in a later year to catch up, but the penalty still applies to the year you missed.