401(k) withdrawal rules: How to avoid penalties

401(k) withdrawal rules: How to avoid penalties

Key takeaways

401(k) withdrawals are often subject to heavy penalties and additional taxes. Check out a few rules and options to consider before withdrawing.

02.05.2025

401(k) plans and other tax-advantaged retirement accounts are popular ways to save for retirement. Every year, millions of Americans contribute to these long-term savings vehicles.

The goal when contributing to a 401(k) plan is to let the money grow and compound for retirement. However, unplanned circumstances can arise that force people to withdraw funds early. Unfortunately, these early withdrawals often come with costly penalties, along with reducing the amount invested for retirement.

Can you withdraw money from a 401(k) early?

Yes, if allowed under the terms of the plan, you can withdraw money from your 401(k) before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences. If you need to tap into retirement funds early, keep reading to learn about the withdrawal rules, the cost of early withdrawals, and how to avoid early withdrawal penalties.

401(k) withdrawal rules

Generally speaking, distributions from a workplace retirement plan cannot be made until one of the following happens:

  • You die or become disabled.1
  • The plan is terminated and isn’t replaced by a new one.
  • You reach age 59 ½.
  • You experience a financial hardship.

Account holders under age 59 ½ often can’t take 401(k) withdrawals from a current employer’s plan at all. If a plan does allow withdrawals or financial hardship requirements are met, you may still be responsible for taxes and penalties.

On the other end of the spectrum, the IRS requires that you begin taking 401(k) withdrawals once you reach age 73. This requirement only applies to pre-tax 401(k) accounts, not Roth accounts.

Read more: Required minimum distributions: The deal on RMDs

The costs of early 401(k) withdrawals

Early withdrawals from a 401(k) account can be expensive. Generally, if you take a distribution from a 401(k) before age 59½, you will likely owe:

  • Federal income tax (taxed at your marginal tax rate).
  • A 10% penalty on the amount that you withdraw.
  • Relevant state income tax.

The 401(k) account can be a boon to retirement savings. Workers have flexibility to change jobs without losing retirement savings. But that can fall apart if retirement savings plans are used like bank accounts in the years preceding retirement. In general, it’s a good idea to avoid tapping any retirement money until you’ve at least reached age 59½.

Taxation on early 401(k) withdrawals

The IRS imposes a 10% additional tax on early 401(k) withdrawals, on top of the ordinary income taxes you’ll be subject to. Let’s look at an example to see how impactful this can be.

Suppose you decide to withdraw $25,000 from your 401(k) plan. First, your withdrawal will be subject to income taxes — this is the case no matter when you make your withdrawal, unless it’s a Roth account.

A single person with an income of $75,000 will have a marginal tax rate of 22%, meaning that’s the rate at which the highest portion of income is taxed. As a result, you’ll pay $5,500 in federal income taxes on the withdrawal. Thanks to the 10% early withdrawal penalty, you’ll owe an additional $2,500. That’s a total of $8,000 in taxes on a $25,000 withdrawal.

You may also be subject to state income tax on your 401(k) withdrawal, depending on where you live. Whether a tax applies and how much you’ll pay varies by state.

Considerations before withdrawing from retirement account

The taxes paid on an early 401(k) withdrawal are the most obvious — and perhaps painful — financial cost, but not the only one. You’ll also have to consider the long-term opportunity cost of taking early withdrawals from your account.

Retirement may feel like an intangible future event, but hopefully, it will be your reality someday. Funds withdrawn early from a 401(k) will result in less money in the account by the time you retire.

Let’s look at the long-term impact of a $25,000 early 401(k) withdrawal. Suppose you’re 40 at the time of the withdrawal, and you plan to retire at 65. That’s 25 years that $25,000 would have to potentially grow and compound. Assuming your account grows at a rate of 7%, that $25,000 would become $135,686 by the time you reach 65.  While $25,000 may seem like a relatively minor amount of money, you’re robbing your future self of potentially far more.

Another thing to consider is investing a portion of your retirement savings into a Roth IRA. While you’ll still have the long-term opportunity cost of early Roth IRA withdrawals, you won’t be subject to the income and early withdrawal taxes you would on a 401(k).

Penalty-free exceptions for early 401(k) or IRA withdrawals

Sometimes, there are circumstances that make it difficult to avoid tapping into retirement accounts — 10% penalty or not.

Before you pay the penalty, be aware that there are several circumstances  where the Internal Revenue Code (IRC) provides exceptions to the 10% penalty rule.2 These exceptions may make it possible to tap retirement savings in a time of need without paying the extra penalty.

Even if the 10% penalty is avoided, you will still owe income tax on any premature IRA or 401(k) distributions.

Also, remember these are broad outlines. Anyone wanting to tap retirement funds early should talk to their financial professional.

Here are the exceptions to the IRS 10% penalty tax on early 401(k) withdrawals:

  • Birth or adoption: You can withdraw up to $5,000 per child for qualified birth or adoption expenses.
  • Death or disability: You won’t pay the 10% penalty if you’re totally and permanently disabled or you’re an account beneficiary and the account owner has passed away.
  • Disaster recovery distribution: If you have economic loss due to a federally declared disaster, you can withdraw up to $22,000.
  • Domestic abuse victim distribution: Victims of domestic abuse can withdraw $10,000 or 50% of their account, whichever is lower.
  • Emergency personal expense: Each person may withdraw up to $1,000 each year for personal or family emergency expenses.
  • Equal payments: You can take penalty-free withdrawals if you take a series of substantially equal payments, which we’ll discuss more later.
  • Medical expenses: You can withdraw the amount of unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).
  • Military: If you’re a qualified military reservist who's been called to active duty, certain distributions can be made penalty-free.
  • Separation from service: You won’t pay the penalty on withdrawals if you leave your job during or after the year you turn 55 (50 for certain government employees).

Options to consider for early withdrawal

If you’re facing financial hardship or need money from your 401(k) for some other reason, there are several options you can consider.

401(k) loan

The IRC allows you to borrow from your 401(k), provided your employer’s plan permits it. It’s important to note that not all employer plans allow loans, and they aren’t required to do so. If your plan does allow loans, your employer can set the terms.

Read more: 401(k) loans: What they are & how they work

The maximum loan permitted under the IRC is $50,000 or half of your 401(k) plan’s vested account balance, whichever is less.

Principal and interest is paid at a reasonable rate set by the plan. These payments typically come out of your paycheck on an after-tax basis. Generally, the maximum term length is five years. However, if you use the loan as a down payment on a principal residence, it can be as long as 30 years. Some employer plans require a minimum loan amount of $1,000.

401(k) loans have several benefits, including:

  • No credit checks.
  • The loan doesn’t appear on a credit report.
  • Interest is paid to your plan account instead of a third-party lender.

Of course, the loans also have some downsides. Taking a 401(k) loan depletes your principal balance, at least temporarily. It will cost you any compounding that your borrowed funds would have received.

Additionally, if you leave your employer for any reason, whether it’s your own choice or not, you’ll usually have to pay back the loan immediately. If you can’t repay your loan, whether it’s within the five-year term or if you leave your job, it will be considered a withdrawal, and you’ll be responsible for taxes and any applicable penalties.

Read more: What happens to your 401(k) if you quit your job?

Hardship withdrawal

Some 401(k) plans allow what is called a hardship withdrawal, which allows someone to withdraw from your 401(k) plan if the following are true:

  • There is an immediate and heavy financial need.
  • The withdrawal is limited to the amount necessary to satisfy the financial need.

The IRC authorizes the withdrawals, but it’s up to each individual plan to decide whether to allow them. It’s up to the plan administrator to determine whether the employee has an immediate and heavy financial need. Large purchases and foreseeable or voluntary expenses generally don’t qualify.

For example, a hardship withdrawal might be a good fit if you need money to pay your child’s college tuition. However, it wouldn’t be available if you wanted to upgrade your car or take your family on vacation.

It’s important to note that while a hardship withdrawal allows you to withdraw from your current 401(k) plan, it doesn’t exempt you from income taxes or the 10% additional penalty, except in those situations listed in the section above.

Substantially Equal Periodic Payments (SEPP)

The IRC allows those under the age of 59 ½ to withdraw from their 401(k) plans without the 10% additional penalty if they do so in the form of a series of substantially equal payments (SoSEPP) over their remaining life expectancy.

In order to establish a SoSEPP, you typically need to be terminated from your employer.  Once established, you can’t continue to contribute to the account, nor can you take any distributions other than your SoSEPP payments. The amount you can withdraw each year is based on one of three methods: the RMD method, a fixed amortization method, or a fixed annuitization method.

Because you must continue taking the SoSEPP distributions each year to avoid the penalty tax, this strategy is best for individuals who are retiring early and leaving the workforce.

IRA rollover bridge loan

There is another way to “borrow” from a 401(k) on a short-term basis if you are eligible to take a distribution, but it’s less official than a 401(k) loan. You can roll your 401(k) balance over into an individual retirement account (IRA). When you roll an account over, the money doesn’t have to be deposited into the new retirement account for 60 days (called an indirect rollover). During that period, you could theoretically do whatever you want with the money.

However, if the money isn’t safely deposited into an IRA when the 60 days are up, the IRS will consider this an early distribution, and you’ll be subject to taxes and penalties. Also, if you do not rollover your balance directly to an IRA, the plan is required to withhold 20% from the amount for federal taxes. You will need to make up that amount from other sources for the 60-day rollover to avoid taxation.

This is a risky move that is generally frowned upon by financial professionals. However, if you want an interest-free bridge loan and you’re sure you can pay it back, it’s an option.

Read more: 401(k) rollover options

Roth IRA conversion

Unlike the other strategies on our list, a Roth IRA conversion won’t allow you to access your money penalty-free right away. However, it’s a way to make some of your money more accessible in the future.

The IRS allows you to convert the money in a traditional IRA or 401(k) to a Roth IRA. You’ll have to pay the income taxes on any pre-tax money you convert, and then you’ll be subject to a five-year waiting period.3 However, once the five years pass, you can access the converted funds at any time for any purpose.

The importance of considering alternatives

It can be tempting to withdraw money from your retirement account when you’re facing a financial rough patch, but this strategy should generally be considered as a last resort. In addition to the taxes and penalties you’ll pay, you’re also robbing your future self of money for retirement.

Depending on your situation, there may be other options available, including using your emergency fund, getting a personal loan, or taking equity from your home using a home equity loan, home equity line of credit (HELOC), or a cash-out refinance.

Consider speaking with a financial professional to explore all options available and make an informed decision based on your individual circumstances.

Pros and cons of 401(k) withdrawal vs. 401(k) loan

401(k) withdrawal

  • Pros
    • You’re not required to pay back withdrawals.
    • Potential penalty-free withdrawals in certain situations.
    • Immediate access to funds for emergencies or financial needs.
  • Cons
    • Early withdrawal penalties and taxes apply if under 59½ years old.
    • Loss of potential growth due to lower account balance.
    • Withdrawn money is not replenished, unlike with a 401(k) loan.
    • Potential withdrawal restrictions and eligibility criteria.

401(k) loan

  • Pros
    • No taxes or penalties are incurred on the borrowed amount.
    • Interest payments contribute back into the retirement account.
    • No impact on credit score if payment missed or defaulted.
  • Cons
    • Risk of default if unable to repay, leading to taxes and penalties.
    • Requirement to repay loan in full upon leaving current job.
    • Limits potential investment growth due to borrowed funds being outside the retirement account.
    • Potential restrictions on loan eligibility and terms based on plan provisions.

Read more: What to do with your 401(k) when you leave your job

The bottom line

Withdrawing money from a 401(k) before age 59 ½ usually results in taxes and costly penalties, but there are several ways to withdraw money penalty-free. Still, it may be best to not touch retirement savings until retirement.

Compounding can have a significant impact on maximizing retirement savings and extend the life of a portfolio. You lose out on that when you take early distributions.

It’s always possible for unforeseen circumstances to arise before retirement. Being aware of the penalty exceptions allows for informed decisions, and to possibly avoid paying extras and fees. However, it’s also important to explore other options.

If you’re considering an early 401(k) withdrawal, use the Empower 401(k) Early Withdrawal Calculator to run the numbers and learn how much you’ll owe in taxes and fees, as well as the projected account loss as a result of the withdrawal.

Get financially happy.

Put your money to work for life and play.

1 IRS, “401(k) Resource Guide - Plan Participants - General Distribution Rules,” November 2024.

2 IRS, “Retirement topics: Exceptions to tax on early distributions,” December 2024.

3 IRS, “Publication 590-B (2023), Distributions from Individual Retirement Arrangements (IRAs),” September 2024.

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Debbie Macey

Contributor

Debbie Macey is an Income Specialist at Empower. A CERTIFIED FINANCIAL PLANNER™ professional, she provides clients with robust planning advice related to various forms of retirement income. 

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