Can You Take Money Out of a 401(k)? Penalties and Exceptions

Taking money out of a 401(k) is allowed at any age, but what it costs you depends on how old you are, why you’re withdrawing, and whether you’re removing the money permanently or borrowing it. After age 59½, you can take distributions for any reason and owe only ordinary income tax. Before 59½, you generally owe that same income tax plus a 10% early withdrawal penalty, unless you qualify for one of the exceptions in the tax code or use a 401(k) loan, hardship distribution, or emergency withdrawal.

After Age 59½

Once you hit 59½, the 10% early withdrawal penalty goes away. You can take money out of a traditional 401(k) for any reason and owe only ordinary federal (and possibly state) income tax on the amount withdrawn.¹

Whether you can withdraw while still working for the employer that sponsors the plan is a separate question. Federal law permits in-service withdrawals after 59½, but individual plan documents can restrict or prohibit them. Check your summary plan description or call the plan administrator. If in-service distributions aren’t allowed, you’ll have to wait until you separate from the employer.

The Cost of Withdrawing Before 59½

An early withdrawal triggers a 10% additional tax under Section 72(t) of the Internal Revenue Code.² That’s on top of ordinary federal income tax, which for 2026 runs from 10% to 37% depending on total taxable income.³ Add state income tax, and a withdrawal can lose 30% to 50% of its value once everything is settled.

Your plan administrator must withhold 20% of any eligible rollover distribution for federal taxes at payout, regardless of your bracket.⁴ That 20% is a deposit against your actual tax bill, not a separate tax. You’ll square up when you file: get money back if your rate is lower, owe more if it’s higher. If you expect to owe more, ask for extra withholding when you request the distribution.

Exceptions That Waive the 10% Penalty

The tax code lists several circumstances where the 10% penalty doesn’t apply, even before 59½. You still owe ordinary income tax on most of them, but skipping the penalty alone can save thousands.

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).¹ The separation can be voluntary or involuntary. For certain public safety employees, including state and local firefighters and law enforcement, the age drops to 50. This exception only reaches the plan at the employer you separated from. It doesn’t cover old 401(k)s at previous jobs or any IRA.

Substantially Equal Periodic Payments

You can set up a schedule of substantially equal periodic payments, sometimes called a 72(t) distribution, based on your life expectancy and take penalty-free withdrawals at any age. The IRS recognizes three calculation methods: a required minimum distribution method, a fixed amortization method, and a fixed annuitization method.⁵ Once you start, you have to continue for at least five years or until you turn 59½, whichever is later. Modify the payments early and the IRS retroactively imposes the 10% penalty on every distribution you’ve taken, plus interest. For 401(k) plans, you must have separated from the employer before starting.

Terminal Illness

Under SECURE 2.0, a participant with a physician-certified terminal illness can withdraw any amount without the 10% penalty. The physician has to certify in writing that the illness or condition is reasonably expected to result in death within 84 months of the certification.⁶ If the participant’s condition improves, the distribution can be repaid to a retirement account within three years.

Other Exceptions

The penalty is also waived for distributions after the account holder’s death (to beneficiaries), distributions under a Qualified Domestic Relations Order during a divorce, and distributions to satisfy certain IRS levies.¹ Disability qualifies too, but the IRS definition is narrow: you have to be unable to engage in any substantial gainful activity because of a physical or mental condition expected to last indefinitely or result in death.

Hardship Distributions

A hardship distribution is a permanent withdrawal before 59½ to cover a severe financial need. You don’t pay it back. The IRS requires the need to be “immediate and heavy” and that you can’t reasonably meet it from other resources. Most plans use IRS safe harbor categories that automatically qualify.⁷ Those categories are:

Unreimbursed medical expenses for you, your spouse, dependents, or plan beneficiary
Costs directly tied to buying a principal residence (not ongoing mortgage payments)
Tuition, fees, and room and board for the next 12 months of post-secondary education for you, your spouse, children, dependents, or beneficiary
Payments needed to prevent eviction from or foreclosure on your primary residence
Funeral or burial expenses for you, your spouse, children, dependents, or beneficiary
Certain costs to repair damage to your principal residence, such as repairs after a natural disaster

The amount is limited to the actual cost of the need, including any taxes or penalties owed on the withdrawal itself.⁸ Hardship distributions are still subject to ordinary income tax, and if you’re under 59½, the 10% penalty applies unless a separate exception covers you. Not every plan offers hardship distributions; verify with your administrator.

SECURE 2.0 Emergency Withdrawals

SECURE 2.0 created new penalty-free withdrawal categories that took effect starting in 2024. Plans can adopt these provisions but aren’t required to, so confirm your plan participates before counting on any of them.

You can withdraw up to $1,000 per calendar year for an unforeseeable or immediate financial need without the 10% penalty, and without documenting the specific emergency. You can’t take another emergency distribution within three years unless you’ve repaid the first one or made enough new contributions to replace it. Repay within three years and you can reclaim the income taxes you paid on it.

Survivors of domestic abuse can withdraw up to $10,000 (indexed for inflation) or 50% of the vested balance, whichever is less, without the 10% penalty.⁶ The withdrawal must be taken within one year of the abuse. You self-certify eligibility; the plan administrator doesn’t investigate. Repay within three years and the distribution is treated as a rollover, refunding the taxes.

If your principal residence or workplace sits in an area with a federal disaster declaration for individual assistance, you can withdraw up to $22,000 without the 10% penalty.⁹ The taxable income can be spread evenly over three tax years, and you can repay the full amount within three years to undo the tax hit entirely.¹⁰

Borrowing Instead of Withdrawing

A 401(k) loan avoids the tax hit because you repay yourself. Federal law caps the maximum loan at the lesser of $50,000 or 50% of your vested account balance.² If your vested balance is small, the law allows borrowing up to $10,000 even if that exceeds 50%. You can have more than one loan outstanding, but the combined balance still can’t exceed the cap.¹¹

Repayment happens within five years, with at least quarterly payments on a level amortization schedule, usually handled through payroll deduction.¹² A loan used to buy a primary residence can have a longer window. Interest rates are typically prime plus one or two points, and the interest goes back into your own account.

The real cost isn’t the interest. It’s the growth you miss while the borrowed money is out of the market. On a $30,000 loan repaid over five years, lost growth at a 7% average annual return works out to roughly $4,000 to $6,000 you won’t recover.

The Trap When You Leave Your Job

If you leave your employer with an outstanding 401(k) loan, the plan can offset your remaining loan balance against your account. That offset is treated as a distribution, meaning income tax on the amount and the 10% penalty if you’re under 59½.¹³

There is a workaround. If the offset happens because you left the job, you have until your tax filing deadline for that year, including extensions, to roll the offset amount into an IRA or another eligible plan. That rollover erases the tax and penalty. You’ll need to come up with the cash from other sources to fund the rollover, since the plan has already kept the money. Can’t swing it? You’ll owe taxes on the unpaid balance when you file.

Roth 401(k) Withdrawals Follow Different Rules

Roth 401(k) contributions are made after tax, so the withdrawal rules are friendlier, but only if you meet both conditions for a qualified distribution. You must be at least 59½ (or disabled or deceased), and at least five tax years must have passed since your first Roth contribution to that plan.¹⁴ Meet both and the entire withdrawal, including earnings, comes out tax-free.

Withdraw before meeting both tests and your original contributions still come out tax-free (you already paid tax on them), but the earnings portion is taxable as ordinary income and may face the 10% penalty.¹⁵ The five-year clock starts January 1 of the year of your first Roth contribution to that specific plan, not the date of the contribution. Roll the Roth 401(k) into a Roth IRA and the IRA’s own five-year clock applies, which may differ.

Rolling Over Rather Than Withdrawing

Leaving a job doesn’t force a taxable event. Rolling a 401(k) into an IRA or your new employer’s plan keeps the tax-deferred status intact. How you do the rollover matters.

A direct rollover, also called a trustee-to-trustee transfer, sends the money straight from your old plan to the new account. Nothing is withheld and you never touch the funds.¹⁶ This is the clean option.

An indirect rollover sends the check to you first. The plan withholds 20% for federal taxes, and you then have 60 days to deposit the full original amount, not just what you received, into an eligible retirement account.¹⁶ To roll the full balance you have to replace that 20% out of pocket. Deposit only what you received and the withheld amount becomes a taxable distribution, hit with the 10% penalty too if you’re under 59½.

Required Minimum Distributions

The money can’t stay in a 401(k) forever. Under current law, you have to start taking required minimum distributions by April 1 of the year after you turn 73.¹⁷ Starting in 2033, that age becomes 75. Miss an RMD or take too little and the IRS imposes a 25% excise tax on the shortfall.

One exception matters: if you’re still working for the employer that sponsors the plan and don’t own more than 5% of the business, you can delay RMDs from that particular 401(k) until the year you actually retire.¹⁷ That exception doesn’t reach 401(k)s at former employers or any traditional IRA. Those still start at 73.

How to Actually Request the Money

Start with your plan administrator, the financial institution listed on your most recent statement. Common examples include Fidelity, Vanguard, and Schwab. Log in through the plan’s portal or call the number on the statement. Before you start, confirm your vested balance. Employer matching contributions often vest on a schedule, so the amount you own may be less than the total balance shown.

You’ll need your Social Security number, plan ID, the reason for the withdrawal, and your preferred tax withholding percentage. For electronic transfers, have your bank routing and account numbers handy. Hardship distributions require you to name the qualifying expense, and the plan may ask for supporting documentation such as a medical bill or mortgage statement. Most electronic requests are reviewed within three to five business days, and funds typically arrive by direct deposit within seven to ten business days from submission.

One last thing to check before you pull the trigger: state income tax. Some states don’t tax income at all, others tax 401(k) distributions at rates up to roughly 13%, and several offer partial exemptions for retirement income that kick in at 59½ or 65. A large lump sum can also push you into a higher federal bracket for the year, so if the amount is significant, running the numbers before you request the distribution is worth the hour it takes.

1
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
5
Internal Revenue Service. Substantially Equal Periodic Payments
6
Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
7
Internal Revenue Service. Retirement Topics – Hardship Distributions
8
Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
9
Internal Revenue Service. Instructions for Form 8915-F
10
Internal Revenue Service. Retirement Plan Distributions After SECURE 1.0 and SECURE 2.0
11
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
12
Internal Revenue Service. Retirement Topics – Loans
13
Internal Revenue Service. Plan Loan Offsets
14
Internal Revenue Service. Roth Account in Your Retirement Plan
15
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
16
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
17
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs