The 401(k) distribution rules come down to three moving parts: your age, the type of account, and whether you still work for the employer sponsoring the plan. Withdrawals from a traditional 401(k) are taxed as ordinary income at your federal bracket, and taking money out before age 59½ adds a 10% penalty on top of that tax unless you qualify for an exception. Starting at age 73, the government requires you to begin withdrawing a minimum amount each year whether you need the money or not.
When You Can Take Money Out
While you are still working for the company that sponsors your plan, the plan will generally not release funds unless you hit one of a few triggers: reaching age 59½, becoming disabled, or qualifying for a hardship distribution. If the plan terminates and no replacement is set up, distributions also open up.1Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
Once you leave the employer for any reason, the balance in that plan becomes available regardless of your age. Taking it before 59½ usually means paying the penalty, but the option is there.
Age 59½ is the bright line. After that birthday, you can withdraw any amount from any 401(k) you hold without the 10% penalty.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Income tax on traditional 401(k) money still applies, but the penalty disappears.
The 10% Early Withdrawal Penalty
A distribution taken before 59½ faces a 10% additional tax on top of the ordinary income tax you already owe.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions On a $50,000 withdrawal in the 22% bracket, that works out to roughly $11,000 in federal income tax plus $5,000 in penalty, leaving about $34,000. The penalty exists to keep retirement money in retirement accounts.
Federal law carves out a list of exceptions. When one applies, you still owe income tax on the traditional 401(k) portion, but the extra 10% goes away. You claim the exception on IRS Form 5329 when you file.3Internal Revenue Service. Instructions for Form 5329
The Rule of 55
If you separate from your job during or after the calendar year you turn 55, the penalty is waived on distributions from that specific employer’s plan. Public safety employees of state or local governments get the same treatment starting at age 50.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The separation can be voluntary or involuntary; only the timing matters.
The exception applies only to the 401(k) tied to the employer you just left. Money in a former employer’s plan or rolled into an IRA does not qualify. If you are eyeing early retirement between 55 and 59½, rolling older balances into your current employer’s plan before you leave preserves access under this rule.
Long-Standing Exceptions
- Total and permanent disability, meaning you cannot engage in substantial gainful activity due to a condition expected to be long-lasting or fatal.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Death of the account holder; beneficiaries can take distributions at any age without the penalty.
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income, penalty-free on the portion above that threshold.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Distributions paid to a former spouse or dependent under a qualified domestic relations order from a divorce or legal separation.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Substantially equal periodic payments, a fixed schedule of withdrawals based on your life expectancy that must continue for the longer of five years or until you turn 59½. Break the schedule early and the penalty applies retroactively to every payment in the series.4Internal Revenue Service. Substantially Equal Periodic Payments
- Military reservists called to active duty for more than 179 days or an indefinite period.5Legal Information Institute. 26 USC 72(t) – Distributions From Retirement Plans to Individuals Called to Active Duty
SECURE 2.0 Additions
Recent legislation added several new penalty exceptions:
- Up to $5,000 per child within 12 months of a birth or finalized adoption.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Distributions to individuals certified by a physician as terminally ill, with no dollar cap.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- One emergency personal expense withdrawal per year of up to $1,000. You can repay within three years, and you generally cannot take another emergency distribution during that repayment window unless the first has been repaid.
- Domestic abuse victims can withdraw up to $10,500 for 2026, available within one year of the abuse. The cap adjusts annually for inflation.6Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
- Up to $22,000 per federally declared disaster, with the option to spread the income over three tax years or repay within three years to recover the taxes paid.7Internal Revenue Service. Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
Documentation varies by exception. Disability and terminal illness require physician certification; the emergency personal expense relies on self-certification. Every exception is reported on Form 5329.
How the Withdrawal Is Taxed
Traditional 401(k) contributions went in before taxes, so every dollar you withdraw counts as ordinary income. The full amount stacks on top of your other earnings for the year, and the total determines your bracket. For 2026, federal brackets run from 10% on the first $12,400 of taxable income to 37% on income above $640,600 for single filers.8Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large one-time withdrawal can push you into a bracket well above the one your salary sits in.
Roth 401(k) money already had taxes paid on the way in. Qualified withdrawals, including earnings, are entirely tax-free as long as the account has been open at least five tax years and you are 59½ or older.9Internal Revenue Service. Retirement Topics – Designated Roth Account Distributions before meeting both conditions can owe tax on the earnings portion.
Most states with an income tax will also tax traditional 401(k) distributions. A few exempt retirement income partially or fully. Your plan administrator may withhold state taxes automatically depending on where you live, so check your withholding elections when you file the request.
The 20% Mandatory Withholding
When the plan pays an eligible rollover distribution directly to you rather than transferring it to another retirement account, the administrator must withhold 20% for federal income tax.1Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules That withholding is a prepayment toward your final tax bill, not an extra charge. Your actual tax could be higher or lower once everything is calculated at filing time.
Moving Money With a Rollover
A direct rollover sends the funds straight from your old plan to a new plan or IRA. No taxes are withheld, no deadline pressure, and the money never touches your account.10Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
An indirect rollover puts a check in your hands. The plan withholds 20% off the top, and you have exactly 60 days to deposit the full original amount into another qualified plan or IRA. If a $100,000 distribution comes to you as $80,000 after the mandatory withholding, you need to find $20,000 from somewhere else to complete the rollover of the full $100,000. Deposit only the $80,000 and the missing $20,000 becomes a taxable distribution, plus the 10% penalty if you are under 59½.10Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Miss the 60-day window entirely and the entire amount becomes taxable. A direct rollover avoids all of this.
Hardship Withdrawals
A hardship distribution is not a penalty exception. It is a reason a plan may let you access funds while still employed, but the withdrawal is generally still subject to both income tax and the 10% early withdrawal penalty unless a separate exception applies. This confusion catches people every year.
Plans are not required to offer hardship withdrawals, but most large plans do. If yours does, the amount cannot exceed your actual financial need, including enough to cover the taxes and penalties the withdrawal itself generates.11Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
The IRS recognizes safe harbor reasons that automatically count as an immediate and heavy need:12Internal Revenue Service. Retirement Topics – Hardship Distributions
- Medical expenses for you, your spouse, or dependents
- Buying a primary home, meaning down payment and closing costs, not ongoing mortgage payments
- Tuition and education fees for the next 12 months of post-secondary school for you or a family member
- Preventing eviction or foreclosure on your primary residence
- Funeral expenses
- Repairing damage to your primary residence that qualifies as a casualty loss
Under SECURE 2.0, plans can now let you self-certify that a withdrawal meets hardship requirements rather than demanding documentation upfront. The plan only investigates further if it has specific reason to doubt the claim. Keep your own records anyway in case the IRS asks later.
Required Minimum Distributions at 73
Once you reach age 73, federal law forces you to start pulling money out of your traditional 401(k) each year. These required minimum distributions ensure the government eventually collects income tax on money that has grown tax-deferred for decades.13Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Under SECURE 2.0, the age moves to 75 for anyone who turns 74 after December 31, 2032.
The first RMD is due by April 1 of the year after you turn 73. Every RMD after that is due by December 31.13Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Waiting until that April 1 deadline for the first one means two taxable RMDs land in the same calendar year, which can push you into a higher bracket. Most people take the first one during the year they turn 73.
Each year’s RMD equals your account balance as of December 31 of the prior year divided by a life expectancy factor from the IRS Uniform Lifetime Table.14Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) If you are still employed past 73 and do not own more than 5% of the company, you can delay RMDs from that employer’s 401(k) until the year you actually retire. Older 401(k)s and traditional IRAs still follow the regular schedule.
Falling short on an RMD triggers a 25% excise tax on the amount you failed to withdraw. That penalty drops to 10% if you correct the shortfall within the correction window, which generally runs through the end of the second tax year after the year you missed the distribution.15Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans The IRS can waive the penalty entirely for reasonable cause if you file Form 5329 with an explanation.3Internal Revenue Service. Instructions for Form 5329
Requesting a Distribution
Distribution request forms live on your employer’s HR portal or the plan administrator’s website. You will specify the dollar amount or percentage, how you want to receive the funds, and whether the money is a cash distribution or a rollover to another retirement account. The form also asks for your federal tax withholding preference; you can elect more than the 20% minimum on eligible rollover distributions if you want to avoid a balance due at filing time.
If your plan is subject to qualified joint and survivor annuity rules and the lump sum value of your benefit exceeds $5,000, your spouse must consent to the distribution in writing.16Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent
By January 31 of the following year, the administrator issues Form 1099-R, which shows the gross distribution, the taxable portion, and any federal or state taxes withheld. Check it against your records before filing. If you claimed a penalty exception, confirm the distribution code in Box 7 matches your situation; an incorrect code creates avoidable friction with the IRS that you can head off by contacting the administrator before filing season.