The purpose of 401(k) contribution plans is to ensure you'll have an income when you stop working and retire. That's why it's important to start your retirement plan at a young age and make deposits throughout your professional life. However, there are instances when people may need to access their money earlier. Thus, one question arises: “What age can you withdraw from 401(k)?”
The answer is, 59 1/2 years of age—that's when you can withdraw from your 401(k) without penalty. It's difficult to make any withdrawals at an earlier age and if you do, you might get penalized.
In this article, we dive deep into the 401(k) age requirements and rules for early withdrawals, what to consider before making a withdrawal, and what other options you might have. Grab a notebook and a pen, and start taking notes.
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What is a 401(k) and how does it work?
As defined by the IRS, a 401(k) is a qualified retirement account that “allows employees to contribute a portion of their wages to individual accounts.” The 401(k) accounts are tax-advantaged and are often offered by employers as a benefit when they're willing to make matching contributions. There are two types of 401k accounts: a Traditional 401(k) and a Roth 401(k).
Traditional 401(k)
If you have a Traditional 401(k) your contributions are deducted from your gross income, before income taxes are deducted. As a result, the money in your account isn't taxed until you withdraw in your retirement, which can lower your yearly taxable income in the years before you retire.
Roth 401(k) Plan
When you have a Roth 401(k), the contributions are deducted from your after-tax income. In this case, there's no tax deduction yearly, but when you retire, you won't have to pay taxes on the amount contributed or the earnings.
What's the 401(k) minimum age to withdraw?
Since a 401(k) is a retirement plan, it comes with certain limitations and rules regarding withdrawals. As of 2024, you can make a 401(k) withdrawal at 59 1/2 years. Withdrawals made before 59 1/2 years may incur a 10% early withdrawal tax penalty, in addition to federal income tax and any applicable state taxes (which vary depending on where you live).
“For example, if you withdraw $10,000 early, you could face a $1,000 penalty and owe income taxes on the full amount, potentially reducing your net withdrawal significantly,” says Brian Chasin, Chief Financial Officer (CFO) with Soba New Jersey.
However, in the following specific cases, the IRS waives the 10% penalty:
- You become totally and permanently disabled
- The money is used to pay for qualified higher education expenses
- The money is used to pay medical expenses not reimbursed by insurance
- You experience an economic loss as a result of a federally declared disaster where you live
- You're a qualified first-time homebuyer
The IRS provides a complete list of exceptions to tax on early distributions. Note that while most exceptions are applicable to both the Traditional 401(k) and the Roth 401(k), some aren't; so you should be sure your account type is eligible.
Rule of 55
Besides the exceptions mentioned above, there's another way to withdraw from your 401(k) early without the 10% IRS penalty: the Rule of 55. By this rule, if you lose or leave your job during the calendar year you turn 55, you can start drawing money from your 401(k) without paying the penalty. However, you still must pay taxes on your withdrawals.
Other important aspects of this rule: First, it's only applicable to a traditional or Roth 401(k) or other qualified retirement plans, like a 403(a) or (b)—traditional IRAs and Roth IRAs are exempt from the rule. Second, you can only withdraw from the plan specific to your last employer, meaning the account you were contributing at the time you left or were fired from your job. Any other accounts you may have can only be touched once you reach the 401(k) age limit of 59 1/2 years.
Besides that, you can only make early withdrawals while the account is still under the employer's plan. If you close that account and move those funds to another account, such as an IRA, you'll be penalized.
Qualified public safety workers (e.g. police officers, air traffic controllers, firefighters) gain an extra five years and can start withdrawing at the calendar year they turn 50. All other restrictions and guidelines under the Rule of 55 stay the same, however.
Other penalty-free 401(k) withdrawal possibilities
If you're in need of cash and are not qualified to take advantage of any IRS exceptions to the 10% penalty, you may have other options, but they each come with specific rules and criteria.
401(k) loan
“If your plan allows, you can borrow against your 401(k) without incurring taxes or penalties, provided you repay the loan within the specified period—typically five years,” Chasin says. You can borrow half of your 401(k) plan’s balance, up to a maximum of $50,000. The interest rate on the loan is set by the plan and the repayments will come from your after-tax paycheck.
SEPP
The Substantially Equal Periodic Payments (SEPP) method is recommended for people leaving the workforce and retiring early. It “allows penalty-free withdrawals if taken as part of a series of substantially equal periodic payments based on your life expectancy,” Chasin says.
The amount you can withdraw each year is determined by the method chosen—fixed amortization (your account balance is spread over your remaining life expectancy), fixed annuitization (an annual payment amount determined by an annuity factor using IRS mortality tables), or required minimum distribution (also known as RMD, it's the minimum amount you must withdraw from your account, as determined by the IRS).
Considerations before making an early 401(k) withdrawal
The most important factor to consider before making an early 401(k) withdrawal is the toll it can take on your savings. “Withdrawing funds early can significantly reduce your retirement nest egg due to penalties, taxes, and lost potential growth,” Chasin says.
If the potential fallouts of an early withdrawal outweigh the future benefits of keeping your money intact, Chasin says, it’s likely best to leave your retirement account untouched until you retire. “Assess all other financial options and seek advice from a financial advisor to understand the full consequences,” he says.
FAQs
How much can I withdraw from my 401(k) after 59 1/2?
After you reach the minimum 401(k) payout age of 59 1/2, you can withdraw as much as you like. Just keep in mind that if you have a traditional 401(k), you’ll need to pay income tax on withdrawals.
Can I start withdrawing from my 401(k) at 55?
Yes, you can, but only if you leave or lose your job during the calendar year that you turn 55. This method is known as Rule of 55 and is allowed by the IRS. Consult the “retirement plans” page of the IRS site for more information.
Can I take all my money out of my 401(k) when I retire?
Yes, after you reach retirement age, you can withdraw the money from your 401(k) as you please—but you’ll need to pay income tax on it upon withdrawal.
At what age is 401(k) withdrawal tax-free?
Taxes on retirement accounts aren’t influenced by age, but rather by plan type. If you have a traditional 401(k) that is funded with your pre-tax income, you must pay an income-tax per withdrawal regardless of your age. If you have a Roth 401(k) plan that is funded with your post-tax income, then your withdrawals are tax-free.
It's important to note that if you make a 401(k) withdrawal before meeting the minimum age requirement (59 1/2), you must pay a 10% penalty tax on top of the income taxes unless you meet one of the exception criteria listed by the IRS.
How much do you have to withdraw from your 401k at age 72?
There's no specific amount you should withdraw from your 401(k) at age 72. However, the maximum age to start withdrawing your account is 73 years old. According to the IRS, from 73 and onward, 401(k) withdrawals are mandatory. The mandatory age used to be 72 for anyone reaching 72 years until December 31, 2022. Consult the Required Minimum Distributions (RMDs) page at the IRS site for more information.
Can I cash out my 401(k) at age 62?
Yes, after you reach the minimum age of 59 1/2, as determined by the IRS, you can start withdrawing from your 401(k) without penalties.
How to withdraw from 401(k) after age 60?
After 60 years of age you can withdraw from your 401(k) as please, like you'd withdraw money from any other account. For instance, you can contact the account administrator to request a withdrawal or do it yourself by logging into your account.
What age can you withdraw from IRA?
Both Simple IRAs and Roth IRA also have 59 1/2 years as the minimum age required to start withdrawing money from the account. Early withdrawals might come with penalties and taxes. Consult the IRS site or a financial advisor for guidance.
Can I cancel my 401(k) and cash out while still employed?
It depends. If you want to close an employer-sponsored 401(k) while still working for the employer sponsoring the account, you may not be able to do it. In this case, consult the company's policies for more info. But if it's a different 401(k) account, then you can withdraw money from it while employed.
However, if you're under the age of 59 1/2, there's a 10% penalty tax you must pay, unless you're qualified by the IRS to make early withdrawals without penalties—or if you choose a penalty-free method, such as a 401(k) loan. Always consult the IRS site and a financial advisor to stay up to date with federal rules and choose the best strategy for your specific situation.