Different rules apply at different ages when it comes to accessing your 401(k) without penalties. The younger your age, the fewer options you have. This is especially the case if you're not yet retired. It can be frustrating if you need the money right now for non-retirement expenses, but the idea of any retirement plan is to ensure that you'll have income when you retire.
Key Takeaways
- You can take a loan from your 401(k) to buy a home or to help pay for college, but you must pay the money back.
- You can take a hardship withdrawal from your 401(k) if the plan is held by your employer.
- You can begin to withdraw from your 401 (k) without penalty when you reach age 55 through age 59½.
- You can't take loans from old 401(K) accounts.
- Your plan administrator will let you know whether they allow an exception to the required minimum distribution rules if you're still working at age 72.
Withdrawing From Your 401(k) Before Age 55
You have two options if you're younger than age 55 and if you still work for the company that manages your 401(k) plan. This assumes that these options are made available by your employer.
You can take a 401(k) loan if you need access to the money, or you can take a hardship withdrawal, but you can only do this from a 401(k) account that's currently held by your employer. You can't take loans out on older 401(k) accounts.
You can roll the funds over to an IRA or another employer's 401(k) plan if you're no longer employed by the company, but these plans must accept these types of rollovers.
Note
Think twice about cashing out because you'lllose valuable creditor protection that stays in place while you keep the funds in your 401(k) plan at work. You could also be subject to a tax penalty, depending on why you're taking the money and your age.
The earliest age at which you can withdraw funds from a 401(k) account without paying a 10% early withdrawal penalty tax is 59½, but the IRS does provide some exceptions to this rule. The penalty is waived if:
- You become totally and permanently disabled.
- You use the money for a first-time home purchase, but this only applies to withdrawals of up to $10,000.
- You use the money to pay for medical expenses that are not reimbursed by insurance.
- You use the money to pay for health insurance premiums during a period of unemployment.
- You use the money to pay for qualified higher education expenses.
These are the most common exceptions, but others are available. You might also be able to take a hardship distribution due to what the IRS refers to as an "immediate and heavy financial need," but you can only withdrawal as much as is necessary to meet that need and the agency clearly states that consumer purchases don't fall under this umbrella. Your 401(k) summary plan description should clearly state the circ*mstances that would qualify.
Note
Check with a tax professional or a financial advisor before you take a withdrawal for any reason so you're sure you understand the rules.
Withdrawing Funds Between Ages 55 and 59½
Most 401(k) plans allow for penalty-free withdrawals starting at age 55.You must have left your job no earlier than the year in which you turn age 55 to use this option. You mustleave your funds in the 401(k) plan after leaving your job in order to access them penalty free, but there are a few exceptions to this rule. This option makes funds accessible as early as age 50 for many police officers, firefighters, and EMTs.
Make sure you understand the rules around the age requirement for penalty-free withdrawals. The age 55 rule won't apply if you retire in the year before you reach age 55, and your withdrawal would be subject to a 10% early withdrawal penalty tax in this case.
The age-55-and-up retirement rule won't apply if you roll your 401(k) plan over to an IRA.
Note
You might retire at age 54 thinking that you can access funds penalty free in one year, but it doesn't work that way. You must wait one more year to retire for this age rule to take effect.
Withdrawing From Age 59½ to Age 72
You can access your funds at age 59½ without paying an early-withdrawal penalty if you've retired and you ended your employment after you reached age 55. You must still have funds in your plan in order to do so, and the rules are the same if you've rolled your 401(k) funds into an IRA. Age 59½ is the earliest you can withdraw funds from an IRA account and pay no penalty.
You can access funds from an old 401(k) plan after you reach age 59½ even if you haven't yet retired. The best idea for 401(k) accounts from a previous employer is to roll them over when you leave a job. You won't be hit with penalties if you withdraw from your old accounts if you're at least age 59½. But you should check with your human resource department about the rules for withdrawing from your 401(k) if you're still in the workplace.
Note
Check with your 401(k) plan administrator to find out whether your plan allows what's referred to as an “in-service” distribution at age 59½. Some 401(k) plans allow this, but others don't.
Required Minimum Distributions
Required minimum distributions (RMDs) start at age 72, as of 2022. You must generally begin taking distributions from all of your tax-deferred retirement plans, such as IRAs and 401(k)s when you reach this age. You must take your first RMD by April 1 of the year following the year you reach 72 (70½ if you turned 70 before July 1, 2019).
Your plan might offer an exception to these mandatory distribution rules if you're still employed by the company that manages your 401(k), and if you're not the owner of the business. Check with your plan administrator to determine whether the company allows an exception to the required minimum distribution rules if you're still working at age 72.
Frequently Asked Questions (FAQs)
When can I take money out of a 401(k) without facing a penalty?
You can withdraw money penalty free from your 401(k) at age 59½, or even earlier for some qualifying purposes. That's the limit set by federal law, but keep in mind that your situation could be complicated if you continue working into your 60s. Check with your employer to see whether you're allowed to withdraw from your 401(k) while working.
How do you withdraw money from your 401(k) after reaching age 59½?
Withdrawing money from a 401(k) account in retirement is the same process as withdrawing money from any other type of account. You can simply request a withdrawal from the institution that holds the account. You may be able to withdraw money as a check, or you can transfer the funds to a bank account.
