At what age can you take 401k distributions without penalty

Early Retirement Distribution Options

Most people who have retirement accounts realize the importance of leaving these assets untouched until retirement age. Even if they don't, the government enforces a number of rules and penalties to discourage withdrawals before age 59½.

If you want to retire before age 59½ and begin taking distributions from your 401k plan, you will generally be subject to a 10% early distribution penalty. The early distribution penalty is the cornerstone of the government's campaign to discourage us from plundering our savings before our golden years.

Luckily, there are a couple of ways to do this without paying the 10% penalty.

Leaving Your Job On or After Age 55

The age 59½ distribution rule says any 401k participant may begin to withdraw money from his or her plan after reaching the age of 59½ without having to pay a 10 percent early withdrawal penalty.

There is an exception to that rule, however, which allows an employee who retires, quits or is fired at age 55 to withdraw without penalty from their 401k (the "rule of 55"). There are three key points early retirees need to know.

First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575.

Second, if you still have money in the plan of a former employer and assuming you weren't at least age 55 when you left that employer, you'll have to wait until age 59½ to start taking withdrawals without penalty. Better yet, get any old 401k's rolled into your current 401k before you retire from your current job so that you will have access to these funds penalty free.

Third, this exception only applies to funds withdrawn from a 401k. IRAs operate until different rules, so if you retire and roll money into an IRA from your 401k before age 59½, you will lose this exception on those dollars.

Substantially Equal Periodic Payments

The substantially equal periodic payment exception is available to anyone with a 401k plan, regardless of age, which makes it an attractive escape hatch. It is called a Section 72(t) distribution. In a 72(t) withdrawal, the distributions must be "substantially equal" payments based upon your life expectancy. Once the distributions begin, they must continue for a period of five years or until you reach age 59½, whichever is longest. The full rules and life expectancy tables can be found in IRS Publication 590. This option generally gives you the least retirement pay out available.

Keep in mind that if you use too high a rate of withdrawal, you could run out of money, even before the 72(t) distribution ends, particularly if your investments decline in value substantially.

Final Comments

These two exceptions are only relevant if you are younger than 59½, since there is no penalty for withdrawals over this age.

Here is an additional resource on the General Distribution Rules related to 401k plans.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Different rules apply at different ages when it comes to being able to access your 401(k) without penalties. The younger your age, the fewer options you have, especially if you're not yet retired. It can be frustrating if you need the money right now for non-retirement expenses, but the idea of any retirement plan is to ensure that you will have income when you retire.

Key Takeaways

• You can take out a loan from your 401(k) to buy a home or help pay for college, but you must pay it back.
• You may take a hardship withdrawal from your 401(k) if the plan is held by your employer.
• When you are age 55 through 59 1/2, you can begin to withdraw from your 401 (k) without penalty.
• You can't take loans out from old 401(K) accounts.
• Your plan administrator will let you know whether they allow an exception to the require-minimum-distribution rules for those still working at age 72.

Withdrawing From Your 401(k) Before Age 55

You have two options if you're younger than age 55 and if you still work for the company that manages your 401(k) plan. This assumes that these options are made available by your employer. You can take a 401(k) loan if you need access to the money, or you can take a hardship withdrawal but only from a current 401(k) account held by your employer. You can't take loans out on older 401(k) accounts. However, you can roll the funds over to an IRA or another employer's 401(k) plan if you're no longer employed by the company, but these plans must accept these types of rollovers.

Note

Think twice about cashing out. You'll lose valuable creditor protection that stays in place when you keep the funds in your 401(k) plan at work. You could also be subject to a tax penalty, depending on why you're taking the money.

Withdrawing Funds Between Ages 55 and 59 1/2

Most 401(k) plans allow for penalty-free withdrawals starting at age 55. You must have left your job no earlier than the year in which you turn age 55 to use this option. You must leave your funds in the 401(k) plan to access them penalty-free, but there are a few exceptions to this rule. This option makes funds accessible as early as age 50 for many police officers, firefighters, and EMTs.

Make sure to understand the rules around the age requirement for penalty-free withdrawals. For example, the age 55 rule won't apply if you retire in the year before you reach age 55, and your withdrawal would be subject to a 10% early withdrawal penalty tax in that case.

The age-55-and-up retirement rule won't apply if you roll your 401(k) plan over to an IRA. The earliest age to withdraw funds from a traditional IRA account without a penalty tax is 59 1/2.

Note

You might retire at age 54, thinking that you can access funds penalty-free in one year, but doesn't work that way. You must wait one more year to retire for this age rule to take effect.

Withdrawing From Age 59 1/2 to Age 72

Access to your 401(k) funds after age 59 1/2 depends on whether you're still working.

Have You Retired?

You can access your funds at age 59 1/2 without paying an early-withdrawal penalty if you're retired, and you ended your employment after you reached age 55. You must still have funds in your plan, and the rules are the same if you've rolled your 401(k) funds into an IRA. Age 59 1/2 is the earliest you can withdraw funds from an IRA account and pay no penalty.

Are You Still Working?

You can access funds from an old 401(k) plan after you reach age 59 1/2, even if you haven't retired. The best idea for old 401(k) accounts is to roll them over when you leave a job. If you are 59 1/2 or older, you will not be hit with penalties if you withdraw from your old accounts. However, you need to check with your human resource department about the rules around withdrawing from your current 401(k) if you are still in the workplace.

Note

Check with your 401(k) plan administrator to find out whether your plan allows what's referred to as an “in-service” distribution at age 59 1/2. Some 401(k) plans allow this, but others don't.

Required Minimum Distributions

Required minimum distributions (RMDs) start at age 72, as of 2021. You must generally begin taking distributions from all of your tax-deferred retirement plans, like IRAs and 401(k)s, when you reach that age. You must take your first RMD by April 1 of the year after you reach 72 if you turned 70 1/2 in the previous year.

Your plan might offer an exception to these mandatory distribution rules if you're still employed by the company that manages your 401(k), and you can't be an owner of the business. Check with your plan administrator to determine whether they allow an exception to the required minimum distribution rules if you're still working at age 72.

Frequently Asked Questions (FAQs)

When can you take money out of a 401(k) without facing a penalty?

You can withdraw money penalty-free from your 401(k) at age 59 1/2. That's the limit set by federal law, but keep in mind that your situation could be complicated if you continue working into your 60s. Check with your employer to see whether you're allowed to withdraw from your 401(k) while working.

How do you withdraw money from your 401(k) after reaching age 59 1/2?

Withdrawing money from a 401(k) account in retirement is the same process as withdrawing money from any other type of account; you simply request a withdrawal from the institution that holds the account. You may be able to withdraw money as a check, or you may transfer the funds to a bank account.

Do I pay taxes on 401k withdrawal after age 60?

How much can I withdraw from my 401k after 59 1 2?

How can I avoid paying taxes on my 401k withdrawal?

At what age can you start taking distributions from your 401k?