Can I Take Money Money From My 401(k) Before I Retire?

You can always take money out of a 401(k), but penalties may apply

Image shows a woman withdrawing money from a safety deposit box. Text reads: "When can . make a penalty-free, taxable withdrawal from my 401(k) before retirement age? You pass away and the account balance is withdrawn for your beneficiary You become disabled You withdraw an amount that is less than is allowable as a medical expense deduction You begin "substantially equal periodic" withdrawals Your withdrawal is a result of a Qualified Domestic Relations Order (QDRO) You are at least 55 years old and have terminated employment "

Maddy Price / The Balance 2019

Can you withdraw money from your 401(k) before you retire? Yes, you always have the right to withdraw some or all of your contributions and their earnings, but it's not always that black and white. Every withdrawal you take will be subject to income taxes, and you might owe a tax penalty as well. It depends on your age.

Here's a summary of different ways you can withdraw money from your 401(k) plan prior to retirement, and what will happen if you do.

Withdrawals Before Age 59 1/2

Any withdrawal made from your 401(k) will be treated as taxable income and subject to income taxes in the year in which you made it, before or after retirement. But you'll also be subject to a 10% early distribution penalty if you're younger than age 59 1/2 at the time you take the withdrawal.

These taxes and penalties can add up and can nearly cut the value of your original withdrawal in half in some cases.

You can avoid these taxes and the penalty with a trustee-to-trustee transfer. This involves rolling over some or all of your 401(k) assets into another qualified account. You might consider a 401(k) loan if you want to access your account's assets because of financial hardship.

You can take a penalty-free withdrawal from your 401(k) before reaching age 59 1/2 for a few reasons, however:

  • You pass away, and the account's balance is withdrawn by your beneficiary.
  • You become disabled.
  • Your unreimbursed medical expenses are more than 7.5% of your adjusted gross income for the year.
  • You begin "substantially equal periodic" withdrawals.
  • Your withdrawal is the result of a Qualified Domestic Relations Order (QDRO) after a divorce.
  • You're at least 55 years old and have been laid off, fired, or quit your job, otherwise known as the "Rule of 55."

Your distributions will still be taxed if you take the money for any of these reasons, but at least you'll dodge the extra 10% penalty.

Withdrawals After Age 59 1/2

Age 59 1/2 is the magic number when it comes to avoiding the penalties associated with early 401(k) withdrawals. You can take penalty-free withdrawals from 401(k) assets that have been rolled over into a traditional IRA when you've reached this age. You can also take a penalty-free withdrawal if your funds are still in the 401(k) plan, and you've retired.

You can take a withdrawal penalty-free if you're still working after you reach age 59 1/2, but the rules change a bit. Check with the plan administrator about its specific rules if you're still working at the company with which you have your 401(k) assets.

Your plan might offer an "in-service" withdrawal that allows you to access your 401(k) assets penalty-free, but not all plans offer this option. And remember, the withdrawal will still be subject to income taxes, even if it's not penalized.

Withdrawals After Age 72

Many people continue to work well past age 59 1/2. They delay their 401(k) withdrawals, allowing the assets to continue to grow tax-deferred. But the IRS requires that you begin to take withdrawals known as "required minimum distributions" (RMDs) by age 72.

Those who are owners of 5% or more of a business can defer taking their RMDs while they're still working, but the plan must have made this election. This only applies to the 401(k) of your current employer. RMDs for all other retirement accounts still must be taken.

The Bottom Line

Having a solid retirement plan means understanding all available opportunities to use your savings in a way that meets your life goals. It's important to know how and when you can withdrawal from your 401(k) plan before you fully retire.

Taking money out of a 401(k) during your working years could also push you into a higher tax bracket, and it will reduce the nest egg that's available to you when you retire.

When Can I Withdraw From My 401(k) Before Retirement but Without Tax Penalties?

You don't have to be in retirement to start withdrawing money from your 401(k). However, there are penalties involved depending on your age. If you wait until after you are 59 1/2, you can withdraw without any penalties. If you can't wait until you are 59 1/2, then you will experience a 10% penalty on the amount withdrawn.

I'm Not Yet 59 1/2, and I No Longer Work for the Company Where I Started My 401(k); What Should I Do With It?

If you are over the age of 55 and are no longer employed, you can start to withdraw money from your 401(k) without penalties. You may be able to keep the 401(k) with your previous employer or move it over to a new company's plan when you start working again.