401(k) Withdrawal Penalty: Detailed Overview

When somebody mentions retirement plans, the first thing that comes to mind is usually 401(k). Under this extremely popular plan, employees contribute a portion of their paychecks to an individual account to guarantee happy and care-free sunset years for themselves and their beloved.

As with most such deals, 401(k) only allows taxpayers to withdraw funds from their account after they reach a certain age. However, there are cases where you absolutely need to withdraw some money, like if your life is threatened by some serious condition that puts these sunset years you were investing in into question. However, even in the cases where the move may be entirely justified, you might still have to face a 401(k) withdrawal penalty and risk major damage to your retirement savings in the long run. While you can sometimes get around the penalty, it’s best to leave your retirement account alone unless you find yourself in a truly desperate situation.

So, can you pull money out of 401(k), and how can you get around early withdrawal penalties when doing so? Keep reading to learn everything you need to know to make the best out of this risky move.

What Is the 401(k) Withdrawal Penalty?

Money that a taxpayer takes out of a 401(k) plan before a specified age is called an early or premature distribution. By default, a 401(k) plan allows you to withdraw money when you reach the age of 59 and a half. However, you can withdraw money earlier as long as you are ready to pay fines and taxes or if your situation falls under an exception.

Are You Allowed to Withdraw from Your 401(k) Early?

Withdrawing funds from your 401(k) before reaching the required age incurs a 10% tax penalty on the amount withdrawn. So, for example, if you withdraw $10,000, you will lose 10%, or $1,000. The important point is that in addition to the penalty for early 401(k) withdrawal, you will still have to pay the basic income tax, and you may also have to pay state taxes, depending on your location.

However, while under the IRS policy such withdrawals incur penalties, there are situations where those fines and additional taxes don’t apply. If you think you may qualify for an exception, you can contact your employer to verify that you are eligible for early withdrawal from your retirement plan.

What’s more, as of 2024, taxpayers can also take emergency withdrawals of up to $1,000 per year. Under this rule, you can take money from your 401(k) before age 59½ without penalty as long as you pay it back within three years.

401(k) Early Withdrawal Penalty Exceptions

If you’re wondering how to get 401(k) without penalty before you reach the required age, here’s a list of 401(k) early withdrawal penalty exceptions for you.

So, here are the common situations where the IRS waives the 10% fine for early cash withdrawals—these cases are classified by the IRS as immediate and urgent financial needs:

• Paying medical bills for you or an immediate family member;
• Education and related expenses;
• Financial hardships related to potential foreclosure or eviction;
• Funeral expenses;
• Paying off bills to repair damage to your home;
• The cost of purchasing a home for a primary residence;
• Terminal illness or disability;
• Birth or adoption of a child (up to $5,000);
• Receiving benefits as a result of a natural disaster;
• Being a victim of domestic violence (50% of the account or $10,000);
• Being called up for military service;
• Separation from service—if you leave your job at age 55 or later;
• Splitting a retirement plan in a divorce—you may need to withdraw money from your 401(k) to split your savings with your ex-partner;
• Transferring your account to another retirement plan.

Receiving money without incurring the penalty for withdrawing 401(k) early is limited to the amount needed to resolve the issue you’re currently facing.

To be eligible to withdraw money from your retirement plan, you must discuss it with a representative of your employer. You will likely need to explain not only the situation but also provide evidence that you have no other source of financial assistance. Ultimately, your employer has the authority to determine your eligibility for a penalty-free early withdrawal, so you better get ready for some negotiations.

It’s important to note that after a hardship withdrawal from your 401(k), you will be unable to make further contributions to the plan for six months.

Other ways to avoid the 401(k) early withdrawal penalty include taking a loan from your retirement plan—this option will allow you to bypass the penalty and taxes. Alternatively, you can also use your individual retirement account (IRA).

Final Thoughts

Under the standard 401(k) guidelines, withdrawals made before reaching the age of 59½ are subject to a 10% penalty. Exceptions to this include certain life hardships (such as health conditions, moving to a new home, family-related issues, or job problems), major life events (such as education, divorce, the birth of a child), and extraordinary expenses. There are also exceptions for taxpayers who quit their jobs at age 55 or older.

If your situation does not fall under one of the exceptions, then you should think about the cost of withdrawing money from your 401(k). Remember that early withdrawals come with two significant costs: taxes and penalties. The amounts of these depend on your age and your income tax rates. Even if you are lucky enough to avoid the 10% penalty, you will still owe income taxes and risk delaying your retirement. All in all, there are a lot of things you should think about carefully before withdrawing money early.

So, your best strategy is thinking long-term, even when it feels bad to do so. You should not withdraw money from your retirement account to make a big-ticket purchase that is not urgent, emergency, or life-saving. Withdrawing money from your 401(k) early is your backup plan and should only be done in the case of an actual emergency or a truly desperate situation.