401(k) Withdrawal Rules: Penalties, Taxes, RMDs, and Exceptions

The rules for a 401(k) withdrawal come down to three questions: how old you are, why you’re taking the money, and whether the account is traditional or Roth. Before age 59½, most distributions from a traditional 401(k) cost you a 10% early withdrawal penalty on top of ordinary income tax, though more than a dozen exceptions can eliminate that extra charge. After 59½, the penalty disappears but income tax still applies. And once you hit 73 or 75, depending on your birth year, the government requires you to start taking money out whether you need it or not.

The 10% Early Withdrawal Penalty

Age 59½ is the main dividing line. Once you reach it, you can take money from any 401(k) without owing the 10% early withdrawal penalty.¹ Before that age, every distribution triggers the penalty unless it falls under a specific exception. The penalty is calculated only on the taxable portion of the distribution and is reported on your tax return for the year you received the money.

The penalty is separate from income tax. You owe both on an early withdrawal from a traditional 401(k) unless an exception applies. Even when an exception waives the penalty, the income tax remains.

Exceptions That Waive the Penalty Before 59½

Rule of 55

If you leave your job during or after the calendar year you turn 55, you can take penalty-free distributions from that employer’s 401(k). Public safety employees of state or local governments get an even earlier threshold at age 50.² The catch is that the exception only covers the plan at the employer you separated from. Old 401(k)s from previous jobs don’t qualify, so consolidating accounts before a planned departure matters if you intend to use this provision.

Substantially Equal Periodic Payments

If you need steady income before 59½ and have already left your employer, you can set up a series of substantially equal periodic payments based on your life expectancy. The IRS allows three calculation methods: a required minimum distribution method that recalculates each year, a fixed amortization method, and a fixed annuitization method. You may switch from either fixed method to the RMD method once without triggering consequences.¹

The payments must continue for at least five years or until you reach 59½, whichever comes later. If you change the payment amount or stop early for any reason other than death or disability, the IRS retroactively applies the 10% penalty to every distribution you already took, plus interest for each year of deferral. That recapture tax can be devastating on years of accumulated payments.

Disability, Death, Divorce, and Terminal Illness

Several personal circumstances waive the penalty. Total and permanent disability qualifies, which the tax code defines as being unable to engage in any substantial gainful activity due to a condition expected to result in death or last indefinitely. This is the IRS’s own standard, not the Social Security Administration’s, though they overlap significantly.³

A qualified domestic relations order issued during divorce or legal separation can direct part of your 401(k) to a former spouse, child, or dependent, and distributions to the alternate payee are penalty-free.⁴ Terminal illness distributions are penalty-free if a physician certifies a condition reasonably expected to result in death within 84 months. Distributions to a beneficiary after the account holder’s death are also exempt from the penalty, though income tax still applies for traditional accounts.²

SECURE 2.0 Additions

Congress added several new penalty-free distribution categories through the SECURE 2.0 Act. Not every plan has adopted all of them yet, so ask your administrator before assuming eligibility.

Emergency personal expenses of up to $1,000 per calendar year. You can repay the amount within three years, and you cannot take another emergency distribution during that repayment window unless you’ve repaid the prior one or made up the difference through new contributions.
Domestic abuse victims can withdraw up to the lesser of $10,000 (indexed for inflation) or 50% of the vested balance, available for one year from the date of the abuse. You self-certify eligibility on the distribution form.⁵
Federally declared disasters allow up to $22,000 per disaster from the start of the incident period through 180 days after the declaration. You can repay within three years and amend your return to recover taxes paid.⁶

Hardship Withdrawals Are Not the Same as Penalty Exceptions

A hardship withdrawal lets you access 401(k) money while still employed if you face an immediate and heavy financial need. It does not automatically waive the 10% penalty for participants under 59½. It simply makes the money available. Whether the penalty applies depends on whether the specific reason also qualifies for one of the exceptions above.⁷

The IRS recognizes these safe harbor reasons that automatically qualify as an immediate and heavy financial need:

Medical expenses for you, your spouse, dependents, or a primary plan beneficiary
Costs directly related to buying a primary home, but not mortgage payments
Tuition, fees, and room and board for the next 12 months of post-secondary education
Payments to prevent eviction or foreclosure on your primary residence
Funeral and burial expenses
Repairs to your primary home after casualty damage
Expenses from a FEMA-declared disaster

The withdrawal is limited to what you actually need, including any taxes and penalties the withdrawal itself will generate. Hardship distributions cannot be rolled over into another retirement account.⁷

Under SECURE 2.0, plans can let you self-certify your hardship rather than submitting documentation like medical bills or tuition statements. You check a box confirming the withdrawal meets a safe harbor reason, the amount doesn’t exceed your need, and you have no other way to cover the cost. The plan administrator only needs to investigate further if it has actual knowledge that the claim doesn’t qualify. This optional provision has been available since January 2023, but your plan has to have adopted it.

How the Money Is Taxed

Every dollar you withdraw from a traditional 401(k) counts as ordinary income in the year you receive it. Because contributions went in pre-tax, the full amount is taxable, not just the earnings.⁸ For 2026, federal income tax rates run from 10% on the first $12,400 of taxable income for single filers up to 37% on income above $640,600.⁹

When your plan pays money directly to you rather than transferring it to another retirement account, the administrator must withhold 20% for federal taxes upfront.⁸ That withholding is a prepayment toward your actual tax bill, not an additional charge. If your effective rate turns out to be lower than 20%, you get the difference back at filing time. If it’s higher, you owe the balance. You can request additional withholding above the 20% minimum if you expect to land in a higher bracket.

Roth 401(k) Distributions

Roth 401(k) contributions were made with after-tax dollars, so the tax treatment on the way out is completely different. A qualified distribution comes out entirely tax-free, both contributions and earnings. To qualify, the distribution must be made after you’ve had the Roth account for at least five tax years, and you must meet one of three conditions: you’re 59½ or older, you’re disabled, or the distribution goes to a beneficiary after your death.¹⁰

Distributions that don’t meet those conditions are partially taxable. Your original contributions come out tax-free, but the earnings portion is taxed as ordinary income and may also face the 10% early withdrawal penalty.

State Income Taxes

State income taxes add another layer of cost. Roughly a dozen states impose no income tax on retirement distributions at all, while others tax them the same as wages. Some states exempt a portion of retirement income once you reach a certain age. Because the variation is wide, check your state’s rules before building a withdrawal plan around federal-only numbers.

Required Minimum Distributions

The government doesn’t let tax-deferred money grow indefinitely. Once you reach a certain age, you must start taking required minimum distributions from your traditional 401(k) each year. The SECURE Act and SECURE 2.0 Act set the current age thresholds:¹¹

Born 1951 through 1958: RMDs begin at age 73.
Born 1960 or later: RMDs begin at age 75.
Born in 1959: A drafting error in SECURE 2.0 assigned both 73 and 75 to this birth year. Confirm your required beginning date with your plan administrator.

Each year’s RMD is calculated by dividing your account balance as of the previous December 31 by a life expectancy factor from IRS tables. The math is straightforward. The deadlines are where people trip up.

First RMD Timing

Your first RMD can be delayed until April 1 of the year after you reach the applicable age. Every RMD after that must be taken by December 31.¹² If you push your first RMD into the following year, you’ll have to take two distributions that calendar year: the delayed first one plus the current year’s. That double distribution can spike your taxable income and push you into a higher bracket. Taking your first RMD in the year you actually reach the required age usually avoids this.

Still-Working Exception

If you’re still employed and own 5% or less of the company, you can typically delay RMDs from your current employer’s 401(k) until you actually retire. This applies only to the plan at your current job, not to 401(k)s from former employers or to IRAs. The plan document must specifically allow this exception, so verify with your plan administrator if you’re working past RMD age.

Penalty for a Missed RMD

Failing to withdraw the full required amount triggers a 25% excise tax on the shortfall. If you correct the miss within a two-year window, the penalty drops to 10%.¹¹ Before SECURE 2.0, this penalty was 50%, so the current rate is an improvement, but 25% of a missed distribution still stings.

Roth 401(k) RMD Exemption

As of 2024, Roth 401(k) accounts are exempt from required minimum distributions during the account holder’s lifetime. Before this change, Roth 401(k) participants had to take RMDs or roll the account into a Roth IRA to avoid them. You can now leave a Roth 401(k) untouched for as long as you live, letting it continue growing tax-free.

Inherited 401(k) Rules

If you inherit a 401(k) from someone who died in 2020 or later, the distribution timeline depends on your relationship to the original account holder. Most non-spouse beneficiaries must empty the entire account within 10 years of the owner’s death. There’s no annual minimum during that window; you just need the full balance distributed by the end of year 10.¹³

Certain eligible designated beneficiaries can still stretch distributions over their own life expectancy instead of following the 10-year rule. A surviving spouse can roll the inherited 401(k) into their own IRA and delay distributions until their own RMD age. A minor child of the deceased can stretch until reaching the age of majority, at which point the 10-year clock starts. A disabled or chronically ill individual can use their own life expectancy for distribution purposes, as can an individual no more than 10 years younger than the deceased.

Non-individual beneficiaries like estates or certain trusts face more compressed timelines and generally must use the deceased’s remaining life expectancy or a five-year distribution period, depending on whether the original owner had already begun taking RMDs.¹³

Loans and Rollovers Before You Take a Taxable Distribution

401(k) Loans

Many plans let you borrow up to the lesser of $50,000 or 50% of your vested balance. If 50% of your vested balance is under $10,000, some plans allow you to borrow up to $10,000.¹⁴ You repay yourself with interest through payroll deductions, and because the money isn’t technically distributed, there’s no income tax or penalty.

The risk arrives when you leave your employer. Any outstanding loan balance that isn’t repaid becomes a taxable distribution. You can avoid that outcome by rolling the outstanding balance into an IRA or another eligible plan by your tax filing deadline, including extensions, for the year the loan is treated as distributed.¹⁴

Direct and Indirect Rollovers

A direct rollover moves your 401(k) balance straight to an IRA or another employer’s plan. Because the money never passes through your hands, there’s no withholding, no tax, and no deadline pressure.

An indirect rollover is messier. Your plan sends the check to you, the administrator withholds 20%, and you then have 60 days to deposit the full original distribution amount into a qualifying retirement account.¹⁵ To roll over the full amount, you need to cover the withheld 20% out of your own pocket. If you only deposit the 80% you received, the withheld portion is treated as a taxable distribution and may also face the 10% early withdrawal penalty if you’re under 59½. You’d get the withheld amount back as a tax credit when you file your return, but the timing mismatch catches a lot of people off guard.

Requesting a Distribution

Most plan providers offer an online portal where you can request a withdrawal, select the amount, and set your withholding preferences. If your plan lacks digital access, contact the plan administrator for paper forms. You’ll need personal identification information and instructions on how you’d like the funds delivered and how much additional tax, if any, you want withheld beyond the mandatory 20%.

For married participants, federal law may require your spouse’s written consent before you can take a distribution or name a non-spouse beneficiary. The consent must be witnessed by a notary or a plan representative.¹⁶ Not every 401(k) plan requires this step because it depends on how the plan is structured, but plans that do will reject your request without it. Check with your administrator early so spousal consent doesn’t delay funds you need quickly.

Once your request is approved, direct deposit typically delivers funds within a few business days. Paper checks take longer. After the distribution, your plan administrator will issue a Form 1099-R for that tax year reporting the gross distribution, the taxable amount, federal tax withheld, and a distribution code that tells the IRS why the withdrawal was made.¹⁷ Keep that form with your tax records because the IRS gets a copy too, and any mismatch between what you report and what the form shows will generate a notice.

1
Internal Revenue Service. Substantially Equal Periodic Payments
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Internal Revenue Service. Retirement Topics – Disability
4
Internal Revenue Service. Retirement Topics – Qualified Domestic Relations Order
5
Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
6
Internal Revenue Service. Disaster Relief FAQs – Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022
7
eCFR. 26 CFR 1.401(k)-1 – Certain Cash or Deferred Arrangements
8
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
11
Federal Register. Required Minimum Distributions
12
Internal Revenue Service. IRS Reminder to Many Retirees: Last Day to Start Taking Money Out of IRAs and 401(k)s Is April 1
13
Internal Revenue Service. Retirement Topics – Beneficiary
14
Internal Revenue Service. Retirement Topics – Plan Loans
15
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
16
U.S. Department of Labor. FAQs About Retirement Plans and ERISA
17
Internal Revenue Service. Instructions for Forms 1099-R and 5498