When Can You Withdraw from Your 401(k)?

You can withdraw from your 401(k) through standard penalty-free withdrawals at 59 ½, early withdrawals with exceptions, hardship withdrawals, or 401(k) loans, though rules and potential penalties vary by option. Withdrawals can provide needed funds today but may reduce your account’s future compounding potential.

At what age can you withdraw from a 401(k) without penalty?

Once you reach age 59 ½, you can start taking money out of your 401(k) without facing the 10% penalty for early 401(k) withdrawal. Just know that you will owe income taxes on pre-tax contribution withdrawals, while Roth 401(k) withdrawals (earnings and all) are tax-free. Early planning of your 401(k) withdrawals helps manage taxes and preserve retirement growth.

However, if you are still working, you will need to see if your company's plan allows for what is called in-service distributions. If your plan does allow for these, you can withdraw funds from your 401(k) account. However, it’s usually best to leave 401(k) funds untouched while working to allow your investments to grow.

401(k) Early Withdrawals

It is possible to access your funds before age 59 ½, but it almost always comes at a cost.

In most circumstances, early withdrawals are subject to a 10% penalty on top of regular income taxes. However, the IRS has exceptions to this rule.

You may be able to avoid the penalty if:

• You become permanently disabled
• You leave your job at age 55 or older (Rule of 55)
• You need funds for certain qualified medical expenses if the unreimbursed medical expenses exceed 7.5% of your adjusted gross income and you do not itemize your taxes

These exceptions fall under in-service distributions, and their availability can vary widely depending on your 401(k) plan. Be sure to check with your plan administrator to determine if they are an available option. Also, if you happen to die, the money going to your beneficiaries will not be subject to the 10% penalty.

Rule of 55

The 401(k) Rule of 55 is a separate IRS rule that lets you take penalty-free withdrawals from your 401(k) if you leave your job in or after the year you turn 55 (or age 50 for certain public safety workers). The Rule of 55 only applies after you have left your job, not while you are still working.

A few other items to keep in mind:

• Applies only to the 401(k) at the job you just left—not previous plans or IRAs
• Regular income taxes still apply, but the 10% early withdrawal penalty is waived
• You must leave your job in the calendar year you turn 55 or later (50 for public safety roles)
• You can take only what you need and can take multiple withdrawals over time, not just a one-time lump sum (if your plan allows it)
• Your specific 401(k) plan must allow early withdrawals, so check with your plan administrator

401(k) Loans

A 401(k) loan allows you to borrow up to 50% of your vested 401(k) account balance with a $50,000 cap. You then pay yourself back at the interest rate of Prime plus 1% over a 5-year period, typically through an automatic payroll deduction. This provides access to funds without early withdrawal penalties, though not all 401(k) plans allow loans.

If you stay on schedule with repayments and follow the 401(k) loan rules, you will not owe any taxes or penalties. However, there are a few risks to consider:

• The money you take out for a 401(k) loan will not be invested while it is out of your account, which could slow your savings growth
• If you quit or lose your job, the outstanding 401(k) loan amount is typically due within 30-60 days
• If this happens, it may be treated as a taxable distribution and subject to a 10% early withdrawal penalty if you are under age 59 ½

For small business owners, choosing a 401(k) that allows low-cost loans provides financial flexibility. Get in touch to explore your options.

401(k) Hardship Withdrawals

A hardship withdrawal lets you access 401(k) funds for an immediate and heavy financial need. To qualify, the withdrawal amount cannot exceed your need, no other financial options exist, and it must match an IRS-approved reason. The amount you take out is taxed as regular income, and a 10% early withdrawal penalty applies if you are under age 59 ½, unless your situation also qualifies for a separate IRS penalty exception.

The IRS allows hardship withdrawals for specific reasons including:

• Medical expenses for you, your spouse, or dependents
• Costs for first time homebuyers
• Tuition and education related fees
• Payments to prevent eviction or foreclosure
• Funeral or burial expenses
• Certain expenses to repair damage to your primary residence (such as from a natural disaster)

The process involves completing a self-certification form, often through your plan's online portal, and you may be required to provide and retain documentation for potential future audits. It is always a good idea to consult with a tax professional to determine what applies to your specific situation. Not all 401(k) plans will offer hardship withdrawals, so it is best to also check if your 401(k) provider offers this option.

401(k) In-Service Distributions

An in-service distribution allows you to access funds from your 401(k) while you are still working. While it can be useful in certain situations, it is not always available and is subject to your plan’s specific rules.

Here is what to know:

• What it is: A withdrawal from your 401(k) while you are still working for your employer.
• Common types: After age 59½ (although some plans allow for pre-59½), vested employer contributions, or from certain older account balances (these may include funds you rolled over from another 401(k) plan, assets covered by outdated plan rules, or contributions that have been in the account for many years).
• Why people use it: Often to roll funds into an IRA for more investment options, lower fees, or different withdrawal strategies.

Not all plans allow for in-service distributions. Availability depends on your specific 401(k) plan rules, and you will want to confirm availability before formally pursuing any specific in-service distribution type.

Before Cashing Out Your 401(k)

Withdrawing from your 401(k) early can greatly reduce your retirement savings due to lost investment growth and compounding over time. And that’s before any potential 10% withdrawal penalties or income tax! If facing financial hardship, consider other options first such as emergency savings, loans, or other assistance programs.

Before withdrawing early, it is smart to talk with a tax professional or financial advisor. Understanding your 401(k) plan rules and the long-term impact of taking money out early can help you avoid costly mistakes and keep your retirement goals on track.

Your 401(k) is designed for your future – so it is best practice to treat it as an absolute last resort. Talk to our team today to find a 401(k) plan that provides flexibility while protecting your future savings.

Key Takeaways

• Always check your plan’s rules and consult with a tax professional when considering a 401(k) withdrawal.
• You can withdraw from your 401(k) at age 59 ½ without a penalty.
• You can withdraw from your 401(k) before age 59 ½ via early withdrawals, hardship withdrawals, loans, or in-service distributions. Each option requires plan approval and may involve taxes or penalties.
• Withdrawing from your 401(k) early can greatly reduce your retirement savings due to lost potential investment growth and compounding.

ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies. Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can limit your future retirement funds.