401(k) Distribution Rules: Penalties, RMDs, and Rollovers

The 401(k) distribution rules turn on two ages and one penalty: at 59½ the 10% early-withdrawal penalty disappears, at 73 the IRS forces you to start taking money out, and every dollar you pull from a traditional 401(k) at any age is taxed as ordinary income. Everything else — hardship withdrawals, the Rule of 55, substantially equal periodic payments, rollovers, loans — is a variation on those three points.

The Two Ages That Structure Everything

Age 59½ is the line the tax code draws for penalty-free access. It comes from IRC Section 72(t), which imposes an extra 10% tax on distributions before that birthday and treats 59½ as the primary cutoff.¹ You don’t have to be retired to cross it. Reaching the age is enough to remove the penalty, although your plan can still restrict in-service withdrawals under its own terms.

Age 73 is the other line. Starting the year you turn 73, you must begin taking required minimum distributions from traditional 401(k), 403(b), 457(b), and traditional IRA accounts each year. The SECURE 2.0 Act moved that age up from 72, and it rises again to 75 for people who turn 73 after 2032.²

Between those ages, withdrawals are optional. Before 59½ they’re penalized unless an exception applies. After 73 they’re mandatory.

What You Owe in Tax on Any Distribution

The penalty is separate from the tax. Every dollar withdrawn from a traditional 401(k) counts as ordinary income for the year, stacked on top of wages, Social Security, and anything else you report, then taxed at your marginal rate. The plan reports the distribution to you and the IRS on Form 1099-R.³

When the plan pays a distribution directly to you rather than rolling it to another account, it must withhold 20% for federal income tax on any amount that would have been rollover-eligible.⁴ That 20% is a prepayment, not a settled bill. If your bracket is higher, you’ll owe more at filing. If it’s lower, part of it comes back as a refund.

The 10% Early Withdrawal Penalty and Its Exceptions

Taking money before 59½ normally costs an extra 10% on top of income tax. Section 72(t)(2) is where the exceptions live.¹ Each exception below removes only the 10%. Regular income tax still applies.

Rule of 55

If you leave your job during or after the calendar year you turn 55, you can take distributions from that employer’s 401(k) without the early-withdrawal penalty.⁵ The exception only covers the plan tied to the employer you separated from. Roll the money into an IRA first and you lose it. Certain public safety employees qualify starting at 50 under SECURE 2.0.⁶

Substantially Equal Periodic Payments

Also called 72(t) payments or SEPP, this route lets you take ongoing withdrawals before 59½ if you commit to a fixed schedule calculated from IRS life expectancy tables. Payments must continue for at least five years or until you turn 59½, whichever is longer.⁷

Medical Expenses

Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income qualify for a penalty exception.⁶ This is the medical piece — a hardship distribution for medical costs uses this same threshold to escape the 10%.

Emergency Personal Expense Distributions

Since 2024, SECURE 2.0 allows one withdrawal per calendar year of up to $1,000 (or your vested balance minus $1,000, if lower) without the 10% penalty. You have three years to repay the distribution to the plan. If you don’t repay and your new contributions don’t at least match the withdrawal, you cannot take another emergency distribution for three calendar years.⁹ The plan has to opt in to offer this feature.

Domestic Abuse Victim Distributions

A victim of domestic abuse can withdraw up to the lesser of $10,000 (adjusted for inflation) or 50% of the vested account balance without the 10% penalty. The distribution must be taken within one year of the abuse, and the participant self-certifies. A three-year repayment window is available.⁹

Terminal Illness and Disability

Distributions taken after a physician certifies terminal illness are penalty-free with no dollar cap. A separate exception covers total and permanent disability. Both leave the distribution taxable as ordinary income.⁶

Hardship Withdrawals: A Common Misunderstanding

Many plans allow hardship withdrawals for an immediate and heavy financial need, but this is a plan feature, not a legal right. The plan document decides whether hardship distributions are offered at all. When they are, the IRS safe-harbor reasons include:¹⁰

Medical expenses for you, your spouse, dependents, or a plan beneficiary
Costs directly related to buying your principal residence (not mortgage payments)
Post-secondary tuition, fees, and room and board for the next 12 months for you or your family
Payments needed to prevent eviction from or foreclosure on your primary home
Funeral expenses for you, your spouse, children, dependents, or a beneficiary
Certain costs to repair damage to your principal residence

The point most people miss: qualifying for a hardship distribution gets money out of the plan, but does not automatically waive the 10% penalty. Only the medical-expense exception (unreimbursed costs above 7.5% of AGI) removes the penalty on its own. Tuition, home purchase, and eviction prevention all keep the full 10% on top of income tax unless another exception applies.⁶ The withdrawal is also capped at the amount needed to cover the expense, including any taxes you’ll owe on the distribution itself.

Roth 401(k) Distributions Work Differently

Because Roth 401(k) contributions are made with after-tax dollars, qualified distributions come out completely tax-free and penalty-free — both contributions and earnings. Two conditions have to be met: you’ve held the account for at least five tax years (counted from January 1 of the year you made your first Roth contribution to that plan), and you’ve reached 59½, become disabled, or died.¹¹

Take a distribution before meeting both conditions and the earnings portion becomes taxable and potentially subject to the 10% penalty. The contribution portion, already taxed, comes out tax-free regardless.

One SECURE 2.0 change worth knowing: as of 2024, Roth 401(k) accounts are no longer subject to required minimum distributions during the account owner’s lifetime. That brings them in line with Roth IRAs and lets the money keep growing untouched if you don’t need it.

Required Minimum Distributions at 73

Your annual RMD is your December 31 prior-year balance divided by the distribution period from the IRS Uniform Lifetime Table. A different table applies if your sole beneficiary is a spouse more than ten years younger.¹² Each year’s deadline is December 31, but your first RMD can be delayed until April 1 of the following year. Delaying pushes two distributions into a single tax year, which can lift you into a higher bracket.

The Still-Working Exception

If you’re still employed and participating in your current employer’s 401(k), you can delay RMDs from that plan until the year you actually retire. It doesn’t apply if you own more than 5% of the business sponsoring the plan.² The exception covers only your current employer’s plan. Old 401(k)s at former employers and traditional IRAs follow the standard schedule.

Missed RMD Penalty

Skipping or shortchanging an RMD triggers a 25% excise tax on the amount that should have been withdrawn. If you correct the shortfall within two years, SECURE 2.0 reduces the penalty to 10%.¹³ The excise tax is reported on Form 5329.

Rollovers: The 20% Withholding Trap

When you leave a job or retire, moving your balance to an IRA or another plan is one of the most common non-taxable distributions available. How you execute the move decides whether the tax code cooperates.

A direct rollover (trustee-to-trustee transfer) sends the funds straight from your old plan to the new plan or IRA. No withholding applies because you never receive the money.¹⁴

An indirect rollover sends the check to you. When that happens, the plan is required by law to withhold 20% for federal income tax, even if you plan to complete the rollover.¹⁵ You then have 60 days to deposit the full original amount, including the withheld 20%, into another eligible retirement account. Whatever you don’t roll over in 60 days is treated as a taxable distribution, plus the 10% penalty if you’re under 59½.¹⁴

The numbers are worth spelling out. If your old plan distributes $100,000 indirectly, you receive $80,000. To avoid taxes on the full amount, you must deposit $100,000 into the new account within 60 days, which means finding $20,000 from somewhere else. The $20,000 comes back at tax time as a refund. A direct rollover skips the entire problem.

Loans as an Alternative

Before pulling a taxable distribution, check whether your plan allows loans. Federal law permits borrowing up to the lesser of $50,000 or 50% of your vested balance, and if 50% of your balance is under $10,000 you can still borrow up to $10,000.¹⁶ The loan must be repaid within five years, longer if it’s used to buy your primary residence.¹⁷

You’re borrowing from yourself. No credit check, and repayments (with interest) go back into your own account. The risk sits on the other side: if you leave your job before the loan is repaid, most plans require full repayment within a short window. Any unpaid balance is treated as a distribution, taxable and penalized if you’re under 59½.

Inherited 401(k) Accounts

The rules above cover your own account. Inherited 401(k) balances follow a separate framework. A surviving spouse can roll the inherited account into their own IRA or 401(k) and use the standard RMD schedule. Most non-spouse beneficiaries must empty the entire inherited account by the end of the tenth year following the year the original owner died, under the SECURE Act’s 10-year rule.¹⁸ Eligible designated beneficiaries — minor children of the account owner, disabled or chronically ill individuals, and beneficiaries not more than ten years younger than the deceased — can stretch distributions over their own life expectancy.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
3
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
4
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
5
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules – Section: Tax on Early Distributions
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. Substantially Equal Periodic Payments
9
Internal Revenue Service. Notice 24-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
10
Internal Revenue Service. Retirement Topics – Hardship Distributions – Section: Safe Harbor Distributions
11
Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
12
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) – Section: Calculating the Required Minimum Distribution
13
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
14
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
15
Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
16
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
17
Internal Revenue Service. Retirement Topics – Plan Loans
18
Internal Revenue Service. Retirement Topics – Beneficiary