Fidelity 401(k) Withdrawal: Rules, Taxes, and Penalties

A Fidelity 401(k) withdrawal starts on the NetBenefits platform once you have a qualifying event, but the taxes and penalties are what actually determine whether taking the money is worth it. If you’re under 59½ and pulling funds out for good, expect federal withholding, state withholding, and a 10% early withdrawal penalty to consume 30% or more of the gross amount. If you’ve already left the employer or you’ve reached 59½, the process is straightforward. If you’re still working and younger than that, your options narrow to a hardship withdrawal or a loan.

When You Can Take Money Out

Federal rules limit distributions of your elective deferrals to specific trigger events: leaving the employer sponsoring the plan, reaching age 59½, becoming disabled, dying (with funds going to your beneficiary), or the plan terminating without a successor.¹ Financial hardship is a separate trigger, covered below.

Separation from service is the most common path. Once you resign, retire, or get let go, your full vested balance becomes accessible. If you’re still employed but have reached 59½, most plans allow in-service withdrawals with no hardship requirement.¹

One point that trips people up: the IRS sets the outer boundary, but your employer’s plan document controls what’s actually available. A plan may permit hardship withdrawals; it doesn’t have to. A plan may allow partial distributions after you leave, or force you to take the whole balance at once. Check your summary plan description on NetBenefits before starting the process.¹

Hardship Withdrawals While Still Employed

If you’re under 59½ and still working for the employer sponsoring the plan, a hardship withdrawal may be your only route to the money, assuming your plan allows one. The IRS defines hardship as an “immediate and heavy financial need,” and certain expenses automatically qualify under the safe harbor standard.²

Unreimbursed medical expenses for you, your spouse, dependents, or plan beneficiary
Payments needed to prevent eviction from or foreclosure on your primary residence
Costs directly related to buying a principal residence, not including mortgage payments
Repairs for casualty-type damage to your principal residence
Tuition, fees, and room and board for the next 12 months of post-secondary education for you, your spouse, children, dependents, or beneficiary
Burial or funeral expenses for your spouse, children, dependents, or beneficiary
Expenses and lost income from a federally declared disaster, if your home or workplace was in the designated area³

One useful rule: the amount you request can include enough extra to cover the taxes and 10% penalty the withdrawal will generate, so the net you receive actually meets the expense.³ Hardship withdrawals cannot be rolled over into another retirement account, and you’ll need supporting documentation such as an eviction notice, medical bill, or tuition statement. Fidelity typically accepts these as PDF or JPEG uploads through its secure document center.

A 401(k) Loan as an Alternative

Before withdrawing permanently, check whether your plan allows 401(k) loans. A loan lets you borrow against your balance and repay yourself with interest that goes back into your own account.⁴ You avoid income tax and the 10% penalty entirely if you repay on time.

Federal law caps 401(k) loans at the lesser of $50,000 or half your vested balance. If half your balance is less than $10,000, you can still borrow up to $10,000 provided the account holds that much.⁵ Repayment must happen within five years, with an exception for loans used to buy a principal residence.

The problem is what happens if you leave the job. Most plans require full repayment within a set window after separation, often 90 days, though your plan document controls the exact deadline. Any unpaid balance becomes a taxable distribution, with the 10% penalty added if you’re under 59½. If the loan was in good standing when you left, the IRS classifies the shortfall as a “qualified plan loan offset,” giving you until your tax return due date (including extensions) to roll that amount into an IRA and avoid the tax hit.

How to Request the Withdrawal on NetBenefits

Fidelity processes most 401(k) withdrawal requests online. A few preparation steps prevent delays.

If you want funds deposited to your bank account, add your routing and account numbers to your Fidelity profile before starting the withdrawal request. If Fidelity can’t verify the banking information instantly, verification can take 7 to 10 days.⁶ After an EFT deposit arrives, Fidelity also places a temporary hold on the funds before they’re fully available, with the length varying by amount.⁷ Get your bank linked early.

Once verification is done, log in to NetBenefits, open your retirement plan, and select the withdrawals option. You’ll pick the distribution type, choose the source of funds within the account, and specify the amount. Decide whether you want a gross amount (before withholding) or a net amount (the cash you actually receive). A summary screen shows the requested amount, estimated withholding, and delivery method before you confirm.

After submitting, save the confirmation number. Checks arrive in five to seven business days.⁸ EFT deposits are typically faster. Status updates appear under the Activity tab, and Fidelity will post to your secure message center if additional documentation is needed.

One boundary to watch: if your employer is changing plan providers, restructuring investment options, or going through a merger, the plan may enter a blackout period during which withdrawals, loans, and investment changes are all frozen. Federal rules require at least 30 days’ written notice for blackouts longer than three days. Check your NetBenefits dashboard for any notices before you plan around a specific date.

What Fidelity Withholds for Taxes

Withholding depends on the type of distribution, and this is where costs stack up.

For distributions that are eligible for rollover, which includes most lump-sum withdrawals after leaving your job, Fidelity must withhold 20% for federal income tax. This is mandatory. Even if you plan to deposit the money into an IRA within 60 days, the 20% comes out first.⁹ The only way to avoid it is a direct rollover, where the funds move straight from the 401(k) to the new account without touching your hands.

Hardship withdrawals work differently. Because they can’t be rolled over, they aren’t subject to the mandatory 20%.¹ Voluntary withholding applies instead, typically defaulting to 10% federal, though you can request a different percentage on the form. Underwithholding just means a bigger bill in April.

State income taxes add another layer. Roughly two dozen states require mandatory state withholding on retirement plan distributions when federal withholding is taken, with rates from about 4% to over 8%. Kansas, Maine, Massachusetts, and Virginia don’t let you waive state withholding at all. States with no income tax, like Florida and Texas, withhold nothing. Check your state’s rule before submitting the request so the net amount doesn’t surprise you.

The 10% Early Withdrawal Penalty

On top of income taxes, a withdrawal taken before age 59½ triggers a 10% additional tax on the taxable portion.¹⁰ It isn’t withheld automatically. You calculate it on IRS Form 5329 when filing your return. Combined with federal and state income tax, the total bite on an early withdrawal often lands between 30% and 40% of the gross.

Congress has built a meaningful list of exceptions. If one applies, you still owe income tax, but the 10% goes away.

Longstanding Exceptions

Separation from service at 55 or older. Often called the Rule of 55, this waives the penalty if you leave the sponsoring employer during or after the year you turn 55. The funds must come from that employer’s plan; rolling to an IRA first disqualifies them. Qualified public safety employees get the same treatment starting at age 50.¹¹
Disability, as defined by the IRS: unable to engage in any substantial gainful activity due to a physical or mental condition expected to be long-lasting or fatal.¹¹
Substantially equal periodic payments based on life expectancy. Once started, they must continue for at least five years or until age 59½, whichever is longer. Stopping early triggers back-penalties on every prior distribution.¹⁰
Payments to a former spouse or alternate payee under a qualified domestic relations order, typically in a divorce.¹²
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (the portion covering those expenses).
Distributions taken because the IRS levied the account.

SECURE 2.0 Additions

The SECURE 2.0 Act, passed in late 2022, added several new exceptions. They’re optional for plan sponsors, with amendment deadlines running through 2026 for most private-sector plans and 2029 for governmental plans. Ask your plan administrator which have been adopted.

Emergency personal expenses: one penalty-free withdrawal of up to $1,000 per calendar year for unforeseeable personal or family emergencies, self-certified with no documentation. Your vested balance must remain above $1,000 after the withdrawal. If you don’t repay within three years, no further emergency withdrawal is allowed until that window closes.
Terminal illness: if a physician certifies life expectancy of 84 months or less, there’s no cap on the penalty-free amount beyond what the plan permits. You have three years to repay any portion to an IRA if your condition improves. Available for distributions taken after December 29, 2022.
Domestic abuse: victims can withdraw up to the lesser of $10,000 (inflation-adjusted starting in 2026) or 50% of the vested balance, penalty-free, with three years to repay. Available January 1, 2024, in plans that adopted it.

Rolling Over Instead of Cashing Out

If you’ve left the employer and don’t need the cash immediately, a rollover into an IRA almost always beats cashing out. A direct rollover moves funds straight from your Fidelity 401(k) to the new IRA without paying you, avoiding both withholding and penalty. No taxes are owed until you later withdraw from the IRA.¹³

An indirect rollover is riskier. The plan pays you, withholds 20% for federal tax, and you have 60 days to deposit the full original gross amount, including the withheld portion, into another qualified account.¹⁴ Any shortfall becomes a taxable distribution, and if you’re under 59½, the 10% penalty applies to whatever you didn’t roll.

Miss the 60-day deadline and the whole thing becomes taxable. The IRS grants waivers only in narrow situations such as bank errors, serious illness, or natural disasters.¹⁴

One interaction matters if you’re between 55 and 59½: rolling a 401(k) balance into an IRA strips the age-55 separation-from-service exception from those funds. Inside an IRA, the penalty-free age becomes 59½ with no workaround.¹⁵ If you might need access in that window, keep the money in the 401(k).

Roth 401(k) Distributions

If you’ve made Roth contributions to the plan, the tax picture shifts. Contributions were already taxed, so they come back tax-free. Earnings are also tax-free, but only if you take a “qualified distribution,” meaning you’ve held the Roth account for at least five tax years and you’re 59½ or older, disabled, or deceased.¹⁶

The five-year clock starts on the first day of the tax year for which you made your first Roth 401(k) contribution to that plan. First contribution in March 2022 means the period began January 1, 2022, and ends December 31, 2026. Withdraw earnings before that date and they’re taxable, plus the 10% penalty if you’re under 59½. Meet both the age and holding requirements and the entire distribution comes out tax-free.

Reporting the Distribution on Your Tax Return

Every 401(k) distribution is reported to the IRS. Fidelity issues Form 1099-R by January 31 of the following year, showing the gross distribution, the taxable amount, and any federal and state tax already withheld.17

You reconcile that against what you owe on your annual return. The 10% early withdrawal penalty gets reported separately on Form 5329. The IRS receives the same 1099-R you do, so unreported distributions eventually trigger a notice with interest and accuracy penalties attached. If you took a distribution in a year you also changed jobs or had other unusual income, run the numbers with a tax professional before April.

1
Internal Revenue Service. 401(k) Resource Guide Plan Participants General Distribution Rules
2
Internal Revenue Service. Retirement Topics – Hardship Distributions
3
Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
4
Fidelity. Taking a 401k Loan or Withdrawal
5
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
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Fidelity Investments. Move Money FAQs
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Fidelity. How Hold Times and Processing Periods Affect the Status of Your Transfer
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Fidelity. Request a Check
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Internal Revenue Service. Pensions and Annuity Withholding
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Internal Revenue Service. Substantially Equal Periodic Payments
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Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
12
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
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Fidelity Investments. Rollover Your IRA
14
Fidelity. What Is the 60 Day Rollover Rule
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Fidelity. What Is the Rule of 55
16
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts>
17
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.