What Age Can You Take Out Your 401k Without Penalty

Take Caution If You Are Not 55 Yet

Do not retire earlier than age 55, thinking you can access your 401 funds penalty-free once you turn 55. For example, if you retire at 54, believing in one year you can access funds penalty-free, youll have missed the mark. To avoid the penalty from 55 59 ½, you needed to leave your employer no earlier than the year you attained the age of 55. When you leave your employer before age 55, the earliest you can access funds penalty-free will be age 59 ½.

If you roll your previous 401 into a new employers 401 or to an IRA, you void the early access rule! Once its rolled over, you cannot withdraw money until youre 59½ without penalties unless you qualify for an exception or use an odd tax code provision called 72 payments.

Ira Rollover Bridge Loan

There is one final way to borrow from your 401k or IRA on a short-term basis. You can roll it over into a different IRA. You are allowed to do this once in a 12-month period.

When you roll an account over, the money is not due into the new retirement account for 60 days. During that period, you can do whatever you want with the cash.

However, if its not safely deposited in an IRA when time is up, the IRS will consider it an early distribution. You will be subject to penalties in the full amount.

This is a risky move and is not generally recommended. However, if you want an interest-free bridge loan and are sure you can pay it back, its an option.

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Withdrawing Funds From 401 At 72

If you are age 72, you must start taking annual distributions from the 401, commonly known as required minimum distributions . You must take the first distribution by April 1 of the year you turn 72, and thereafter, you will be required to take the annual withdrawals by December 31 each year. If you delay in taking the first distribution, you must take two distributions in the same year, which will push you to a higher tax bracket. If you miss taking a mandatory distribution, the IRS imposes a 50% penalty on the amount you were required to take during the specific period.

An exemption to the RMDs is if you are still working. To qualify for this exception, you must not own 50% or more of the employerâs company. You can use this exception to delay taking the mandatory distributions until when you stop working.

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How To Make The Best Use Of The Rule Of 55

The restrictions of the rule of 55 make it vital to use smart retirement planning techniques. First and foremost, you need to time your early retirement so you don’t leave your job before the year in which you’ll turn 55.

Second, if you want to maximize the amount of money you can withdraw without penalties, you should take advantage of rollover options to move as much money as you can into your current employer’s 401 before leaving your job. For example:

• Many companies allow you to roll over 401s from previous employers into your new employer’s account.
• Many also enable you to move money from an IRA into your workplace 401if the money got into the IRA when you rolled over a former workplace 401.

Any money in your current employer’s 401 account when you leave your job will qualify for the rule of 55, so using rollovers to put as much money into that account as possible provides you with the most flexibility. If you don’t roll the money from old 401s or rollover IRAs into your current 401 before leaving, you won’t have the option to withdraw without penalty until age 59 1/2.

Finally, remember not to roll over your eligible 401 account into an IRA after quitting at age 55 or older. Doing so will cause you to lose the exemption and subject you to penalties for withdrawals until you hit 59 1/2.

Can I Withdraw From My 401 At 55 Without A Penalty

If you leave your job at age 55 or older and want to access your 401 funds, the Rule of 55 allows you to do so without penalty. Whether you’ve been laid off, fired or simply quit doesn’t matteronly the timing does. Per the IRS rule, you must leave your employer in the calendar year you turn 55 or later to get a penalty-free distribution. So, for example, if you lost your job before the eligible age, you would not be able to withdraw from that employer’s 401 early you’d need to wait until you turned 59½.

It’s also important to remember that while you can avoid the 10% penalty, the rule doesn’t free you from your IRS obligations. Distributions from your 401 are considered income and are subject to federal taxes.

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Requirements For Hardship Withdrawals

The IRS also allows for penalty-free distributions before the age of 59 1/2 in hardship-related circumstances. To qualify for a hardship withdrawal, you, your spouse, or a dependent must experience “an immediate and heavy financial need” and the amount you are withdrawing must be “necessary to satisfy the financial need.”

These are the scenarios the IRS provides that might constitute an immediate and heavy need:

• Certain medical expenses
• Costs associated with purchasing a primary home
• Tuition and educational fees and expenses
• Expenses associated with the repair of damage to a primary home under certain circumstances
• Money necessary to prevent eviction or foreclosure from a primary home

However, your plan administrator may not permit hardship withdrawals regardless of the circumstances. And, the IRS requirements specify that you must not have any other source of funds to cover the “immediate and heavy” expenses.

Understanding The Rules For 401 Withdrawal After 59 1/2

LAST REVIEWED Apr 15 20219 MIN READ

A 401 is a type of investment account thats sponsored by employers. It lets employees contribute a portion of their salary before the IRS withholds funds for taxes, which allows interest to accumulate faster to increase the employees retirement funds. Now, if you have a 401, you could pay a penalty if you cash out your investment account before you turn 59 ½.

Heres some more information about the rules you need to follow to maximize your 401 benefits after you turn 59 ½.

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Can I Cash Out My Ira At Age 62

Once you reach age 59½, you can withdraw money without a 10% penalty from any type of IRA. If it is a Roth IRA and you’ve had a Roth for five years or more, you won’t owe any income tax on the withdrawal. If it’s not, you will. Money deposited in a traditional IRA is treated differently from money in a Roth.

Medical Expenses Or Insurance

If you incur unreimbursed medical expenses that are greater than 10% of your adjusted gross income in that year, you are able to pay for them out of an IRA without incurring a penalty.

For a 401k withdrawal, the penalty will likely be waived if your unreimbursed medical expenses exceed 7.5% of your adjusted gross income for the year.

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It Will Be Counted As Taxable Income

In addition to the early withdrawal fee, there are taxes on cashing out a 401 that you need to be aware of. The government treats 401 withdrawals as taxable income, and 20% will automatically be withheld to cover federal taxes. You could end up getting some of this back as a tax refund, but it will depend on your particular financial circumstances. Also, you won’t see the refund until the following year.

The mandatory federal tax withholding combined with the IRS’s 10% penalty for cashing out means that you will automatically lose 30% from your distribution if you cash out early. If you make a withdrawal of $10,000, for instance, you’ll only receive about $7,000.

The extra income you receive from the withdrawal could also move you into a higher tax bracket, meaning that a portion of what you’ve made, including the 401 withdrawal, could be taxed at a higher rate.

Making A Hardship Withdrawal

Depending on the terms of your plan, however, you may be eligible to take early distributions from your 401 without incurring a penalty, as long as you meet certain criteria. This type of penalty-free withdrawal is called a hardship distribution, and it requires that you have an immediate and heavy financial burden that you otherwise couldn’t afford to pay.

The practical necessity of the expense is taken into account, as are your other assets, such as savings or investment account balances and cash-value insurance policies, as well as the possible availability of other financing sources.

What qualifies as “hardship”? Certainly not discretionary expenses like buying a new boat or getting a nose job. Instead, think along the lines of the following:

• Essential medical expenses for treatment and care
• Home-buying expenses for a principal residence
• Up to 12 months worth of educational tuition and fees
• Expenses to prevent being foreclosed on or evicted
• Burial or funeral expenses
• Certain expenses to repair casualty losses to a principal residence

The home-buying expenses part is a bit of a gray area. But generally, it qualifies if the money is for a down payment or for closing costs.

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Age 72 And Over: Required Minimum Withdrawals Are Mandatory

Once you turn 72, you must start taking annual Required Minimum Distributions from your Traditional IRA. Your first RMD must be taken by April 1 of the year following the year you reach age 72. Every year thereafter you must take an RMD by December 31. The amount of your RMD is calculated by dividing the value of your Traditional IRA by a life expectancy factor, as determined by the IRS. You can always withdraw more than the RMD, but remember that all distributions are taxed as income. If you dont make withdrawals, youll have to pay a 50% penalty on the amount you shouldve withdrawn. Learn more about RMDs.

What Is The Penalty For An Early 401 Withdrawal

Taking money out of your 401 retirement plan early might sound like a good idea compared to borrowing money or putting a large expense on a credit card. But if you cash out your 401 or access your funds before you reach the age of 59 1/2, you will likely face a 10% early withdrawal penalty on the sum you took out. What that means is if you take out $5,000 at age 48, youll lose $500 as a penalty, and youll pay personal income tax on the whole $5,000.

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See If You Qualify For An Exception To The 10% Tax Penalty

Generally, the IRS will waive it if any of these situations apply to you:

• You choose to receive substantially equal periodic payments. Basically, you agree to take a series of equal payments from your account. They begin after you stop working, continue for life and generally have to stay the same for at least five years or until you hit 59½ . A lot of rules apply to this option, so be sure to check with a qualified financial advisor first.

• You leave your job. This works only if it happens in the year you turn 55 or later .

• You have to divvy up a 401 in a divorce. If the courts qualified domestic relations order in your divorce requires cashing out a 401 to split with your ex, the withdrawal to do that might be penalty-free.

Other exceptions might get you out of the 10% penalty if you’re cashing out a 401 or making a 401 early withdrawal:

• You become or are disabled.

• You rolled the account over to another retirement plan .

• Payments were made to your beneficiary or estate after you died.

• You gave birth to a child or adopted a child during the year .

• The money paid an IRS levy.

• You were a victim of a disaster for which the IRS granted relief.

• You overcontributed or were auto-enrolled in a 401 and want out .

• You were a military reservist called to active duty.

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What Are The Hardship Rules For 401 Withdrawal

The rules can vary by plan, and plan participants should always consult their plan documentation to see the specific rules that will apply. Remember that even with a solo 401, you should have your rules written down and documented. However, there are a couple of basic rules that will always hold true when it comes to a hardship 401k withdrawal. First, the withdrawal must be for an immediate and heavy financial need. Next, you are only allowed to withdraw enough funds to cover that immediate need. For example, missing a mortgage payment typically does not qualify as an immediate and heavy need. However, if you have received foreclosure papers and are in danger of eviction, then that constitutes an immediate and heavy need. Again, you should contact your plan administrator with any questions about the hardship requirements for your qualified plan.

Example Of The Rule Of 55

For example, suppose you’re 57 years old and are laid off from your job. Now that you don’t have income from work, you may need to dip into your 401 funds. If you were younger than 55, you would have to pay a 10% penalty in order to do that. However, per the Rule of 55, because distributions were made to you after you separated from service with your employer and after the year you reached age 55, you can take penalty-free distributions from your employer-sponsored retirement savings account.

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Retirement Funds Don’t Have To Be Off

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

For those who invest in their 401 plan, the traditional thinking is to wait until retirement before taking distributions or withdrawals from the account. If you take funds out too early, or before the age of 59½, the Internal Revenue Service could charge you with a 10% early withdrawal penalty plus income taxes.

However, life events can happen, which might put you in a position where you need to tap into your retirement funds earlier than expected. The good news is that there are a few ways to withdraw from your 401 early without incurring a penalty from the IRS.

Can The Penalty For Not Taking The Full Rmd Be Waived

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329PDF and attach a letter of explanation. See the instructions to Form 5329PDF.

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Build An Emergency Fund

This should be the foundation of your financial plan and experts recommend having about six months worth of expenses saved. You can park this money in a high-yield savings account to earn more interest than you would in a traditional checking account. An emergency fund should help you manage most of lifes curveballs.

Are You Still Working

You can access funds from an old 401 plan after you reach age 59½ even if you haven’t yet retired. The best idea for old 401 accounts is to roll them over when you leave a job. You won’t be hit with penalties if you withdraw from your old accounts if you’re at least age 59½. But you should check with your human resource department about the rules for withdrawing from your current 401 if you’re still in the workplace.

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