What You Can Do With a 401(k) Before and After Retirement

How much you can withdraw from a 401(k) depends on your age and whether you still work there

A 401(k) is designed to stay locked until you turn 59½. If you withdraw money before that age, you typically owe income tax on the amount plus a 10 percent early withdrawal penalty — meaning a $10,000 withdrawal could cost you $1,000 in penalty alone, on top of income tax. Once you turn 59½, you can withdraw as much or as little as you want, whenever you want, and pay only income tax (no penalty).

The rules shift again at age 73, when the IRS requires you to take a minimum amount each year, called a required minimum distribution or RMD. The amount is calculated based on your age and account balance. If you do not take it, the penalty is steep — 25 percent of the amount you should have withdrawn (or 10 percent if you correct it within two years).

If you still work for the company that sponsors your 401(k), some plans let you borrow against your balance or withdraw money while employed, but this varies by plan. Check your plan documents or ask your HR department what your specific plan allows.

Key Takeaways

• Withdrawals before age 59½ trigger both income tax and a 10 percent penalty, unless an exception applies.
• After 59½, you can withdraw without penalty, though you still owe income tax on the money.
• At age 73, you must withdraw a calculated minimum amount each year or face a 25 percent penalty on the shortfall.
• Some plans allow loans or in-service withdrawals while you are still employed, but rules vary by employer.
• Roth 401(k)s have the same withdrawal rules as traditional 401(k)s, but may have access to withdrawals are tax-free.

Early withdrawal exceptions that avoid the 10 percent penalty

The IRS recognizes certain hardships where you can withdraw before 59½ without the 10 percent penalty. You still owe income tax, but the penalty is waived. These exceptions include disability, a medical bill that exceeds 7.5 percent of your adjusted gross income, a series of substantially equal periodic payments (called a SEPP or 72(t) distribution), and death (your beneficiary can withdraw penalty-free).

Some plans also allow withdrawals for specific hardships like eviction, foreclosure, or burial expenses, but these are plan-specific and not required by law. Your plan administrator can tell you which hardships your plan covers.

The SEPP exception is complex: you must take equal payments over your life expectancy (calculated by IRS tables), and if you stop or change the amount before age 59½, you owe the penalty retroactively on all prior withdrawals. This route requires careful planning and often benefits from professional guidance.

Loans against your 401(k) balance

If your plan allows it, you can borrow from your own 401(k) without triggering the early withdrawal penalty. The loan must be repaid with interest, and you set a repayment schedule (usually five years, longer if the loan is for a home purchase). The interest rate is typically the prime rate plus 1 or 2 percent, set by your plan administrator.

The catch: if you leave your job, most plans require you to repay the loan within 60 days or it becomes a taxable withdrawal. If you cannot repay it, you owe income tax on the balance plus the 10 percent early withdrawal penalty if you are under 59½. This makes a 401(k) loan risky if your job is unstable.

Not all plans offer loans, and those that do set their own rules about how much you can borrow (often 50 percent of your balance, up to $50,000). Ask your HR department or plan administrator whether loans are available and what the terms are.

Withdrawals after you turn 59½

Once you reach 59½, you can withdraw any amount from your 401(k) without the 10 percent penalty. You pay income tax on the withdrawal at your ordinary tax rate — the same rate you pay on wages. There is no limit to how much you can withdraw or how often.

Many people use this flexibility to withdraw just what they need each year, leaving the rest to grow. Others withdraw a lump sum all at once. The choice depends on your income needs, tax situation, and how long you expect the money to last.

If you are still working at 59½, you can usually start withdrawals even if you have not retired. Some plans require you to separate from service first, so check with your plan administrator.

Required minimum distributions starting at age 73

At age 73, the IRS requires you to withdraw a minimum amount each year, whether you need the money or not. The amount is calculated by dividing your account balance on December 31 of the prior year by a life expectancy factor published by the IRS. For example, at age 73 the factor is roughly 26.5, so a $500,000 balance would require a minimum withdrawal of about $18,868.

You must take your first RMD by April 1 of the year after you turn 73. After that, withdrawals are due by December 31 each year. If you miss the important date, the penalty is 25 percent of the amount you should have withdrawn (reduced to 10 percent if you correct it within two years).

If you have multiple 401(k)s, you calculate the RMD for each one separately, but you can withdraw the total amount from one account if you choose. IRAs have separate RMD rules and cannot be combined with 401(k)s for this purpose.

Rollovers and transfers to other accounts

You can move money from a 401(k) to an IRA or to another employer's 401(k) through a rollover. A direct rollover (trustee-to-trustee transfer) moves the money without you touching it, so there are no tax consequences. An indirect rollover means the plan sends you a check; you then have 60 days to deposit it in another retirement account or it becomes taxable income.

Rollovers are useful if you change jobs and want to consolidate accounts, or if you want access to different investment options. IRAs typically offer more investment choices than 401(k)s, but 401(k)s offer stronger creditor protection in some states.

If you have a Roth 401(k), you can roll it to a Roth IRA, and the money stays tax-free. Rolling a traditional 401(k) to a Roth IRA triggers income tax on the full amount in the year you roll it over.

What happens to your 401(k) if you die

Your 401(k) passes to your named beneficiary outside of probate. The beneficiary can withdraw the money penalty-free, regardless of age, but they owe income tax on it. The timing depends on whether the beneficiary is a spouse, a non-spouse family member, or a non-family member.

Spouses have the most flexibility: they can roll the 401(k) into their own IRA and delay withdrawals until their own RMD age. Non-spouse beneficiaries must withdraw the entire balance within ten years (as of 2024 rules, which are still being finalized). Non-family beneficiaries have even shorter timelines in some cases.

If you do not name a beneficiary, the account goes to your estate and may be subject to probate, which delays access and can increase costs. Review your beneficiary designation every few years, especially after major life changes.

Frequently Asked Questions

Can I withdraw from my 401(k) if I am still working?

It depends on your plan. Some plans allow in-service withdrawals or loans while you are employed; others do not. Check your plan documents or contact your HR department. If your plan does not allow withdrawals, you may be able to roll the balance to an IRA, which has fewer restrictions.

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

A withdrawal is permanent — you remove money and owe income tax (and possibly a penalty). A loan must be repaid with interest, and if you repay it on time, there are no tax consequences. Loans are only available if your plan offers them.

Do I have to take my required minimum distribution all at once?

No. You can take it in monthly, quarterly, or annual installments — the total just has to equal the calculated minimum by December 31. Some people take it all at once; others spread it out to manage their tax bracket.

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

The IRS charges a penalty of 25 percent of the amount you should have withdrawn (10 percent if you correct it within two years). For example, if your RMD is $20,000 and you withdraw nothing, the penalty is $5,000. You still owe income tax on the RMD amount itself.

Can I roll a 401(k) to an IRA after I turn 59½?

Yes. Age does not restrict rollovers. You can roll a 401(k) to an IRA at any age, as long as you follow the 60-day rule (or use a direct transfer). After the rollover, the money follows IRA withdrawal rules, not 401(k) rules.