Can I Withdraw Money from My 401(k) Before I Retire?

You Can Always Access Your 401(k) Assets, But Penalties May Apply

Image shows a woman withdrawing money from a safety deposit box. Text reads:

Image by Maddy Price © The Balance 2019

It is a very common question in the world of retirement planning: Can you withdraw money from your 401(k) before you actually retire? The simple answer, is yes, you always have the right to withdraw some or all contributions and their earnings from your 401(k) and every withdrawal will be subject to income taxes. The long answer is that it's not always that simple and any taxes or penalties you might owe on that withdrawal will depend primarily on your age.

Below is a summary of different ways to withdraw money from your 401(k) plan prior to retirement:

Withdrawal from 401(k) Before Age 59½

While you have the right to access your 401(k) contributions and their earnings at any time, if you make a withdrawal before age 55, you are likely going to face some steep penalties.

First and foremost, it is important to recognize that any withdrawal made from your 401(k) with be treated as taxable income and subject to income taxes in the year in which you made the withdrawal. But in addition to the income taxes that will be owed, you will also be subject to an additional 10% early distribution penalty.

For some taxpayers, these taxes and penalties can add up and nearly cut the value of your original withdrawal in half.

If you are looking to transfer or rollover your 401(k) assets to another qualified account, you can avoid these taxes and penalties with a proper trustee-to-trustee transfer. If you're looking to access your 401(k) assets because of financial hardship or for a large purchase like a down payment on a house, you could consider a 401(k) loan, but you should try to avoid a taxable withdrawal at all costs.

Last, but not least, there are circumstances under which you can make a penalty-free taxable withdrawal from your 401(k) before reaching age 59½:

  • You pass away and the account balance is withdrawn for your beneficiary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

Withdrawal from 401(k) After Age 59½

In the eyes of the IRS, age 59½ is the magic number when it comes to avoiding the penalties associated with early 401(k) withdrawals. At age 59½, you can make penalty-free withdrawals from 401(k) assets that have been rolled over into a traditional IRA.

If your funds are still in the 401(k) plan and you are retired, you can also make a withdrawal penalty-free. If you reach age 59½ and are still working, however, the rules may change slightly.

At age 59½ or older, you can generally access 401(k) assets penalty-free from a former employer's plan even if you are still working. But if you reach age 59½ and are still working at the company with whom you have your 401(k) assets, you will have to check with the plan administrator about the specific rules of your plan.

Your plan may offer what is called an "in-service" withdrawal that will allow you to access your 401(k) assets penalty-free, but many plans do not offer this option. Remember, even if the withdrawal isn't penalized, it will be subject to income taxes. 

Withdrawal from 401(k) After Age 70½

While you can generally access your 401(k) assets penalty-free starting at age 59½, many people continue to work well past that age and, therefore, delay their withdrawals allowing the assets to continue to grow tax-deferred. By age 70½, however, the IRS will begin to mandate that you make withdrawals known as required minimum distributions (RMDs)

Minimum withdrawals from your IRAs are always required at age 70 1/2, but you can delay taking them from your current employer-provided plan, such as your 401(k), until April 1 of the year after you retire.

One exception to this rule is that employees who own more than 5 percent of the company sponsoring the plan still have to begin taking distributions from a 401(k) plan at age 70 1/2.

A solid retirement plan requires the examination of all available opportunities to use your retirement savings accounts to meet important life goals. It is important to understand how and when you may access your retirement savings in a 401(k) plan prior to your full retirement.

Just make sure you fully understand the income tax implications of any withdrawal decisions. Taking money out of a 401(k) during your working years could potentially push you into a higher tax bracket and reduce your retirement nest egg available for the future.