Key points
- You can access money in your 401(k) only in certain circ*mstances.
- All 401(k) withdrawals from pretax accounts are subject to income tax, and an early withdrawal may also be subject to a 10% penalty.
- You generally must start taking withdrawals from your 401(k) by age 73 but can avoid this requirement if you’re still working.
You spend years contributing your hard-earned money to your employer’s 401(k) plan throughout your career. And whether you’re planning to retire early or stick it out until well into your 60s, you’ve probably wondered when you can access that money.
There are some complex rules around 401(k) withdrawals. There isn’t necessarily one specific age at which you can access the funds. But when you take the money out may impact how much it costs you.
Understanding 401(k) distributions
A 401(k) is an employer-sponsored retirement plan that offers certain tax advantages, including the ability to contribute pretax money and let it grow tax-deferred during your working years.
Once you’re ready to take money from your 401(k) — usually during retirement — you’ll take what are called distributions or withdrawals. For many retirees, these withdrawals serve as an income replacement.
If you’ve read about 401(k) plans, you’re probably familiar with the concept of a “minimum withdrawal age.” But contrary to popular belief, there isn’t actually a minimum withdrawal age for a 401(k), explains Luke Pavlatos, senior financial consultant with John Hanco*ck Advice.
“Technically speaking, there is no minimum withdrawal age,” Pavlatos says. “If someone separates from their employer and is deemed eligible for a distribution, it can be taken.”
According to the IRS, one of the following situations must occur before you or a beneficiary can take money from a 401(k) plan:
- You die, become disabled or have a severance from employment.
- The 401(k) plan terminates and isn’t replaced by another defined contribution plan.
- You reach age 59½ or experience financial hardship.
But just because 401(k) withdrawals are allowed in the above situations doesn’t mean they’re all treated the same. And while there’s technically no minimum withdrawal age for a 401(k), there is often a different tax treatment for withdrawals before age 59½ versus those that happen after.
401(k) withdrawals before age 59½
You can generally take 401(k) withdrawals before age 59½ if you become disabled, you have a severance from employment, your 401(k) plan is terminated or you experience financial hardship. However, you could face financial consequences for doing so.
“If a withdrawal is not a ‘qualified withdrawal,’ the account holder will pay income taxes and a 10% early withdrawal penalty if the account holder is under the age of 59½,” Pavlatos says.
Example: Suppose you withdraw $10,000 from your 401(k) before age 59½. And let’s say you have an effective tax rate (meaning your average tax rate) of 14%. Your $10,000 withdrawal will be subject to income taxes at your effective tax rate, for a tax liability of $1,400. You will also pay a 10% penalty, or $1,000, for taking a withdrawal before age 59½. That means you will owe $2,400 in taxes and penalties, leaving you with only $7,600 of your $10,000 withdrawal.
The IRS does provide some exceptions, however. A distribution will not be subject to the 10% penalty in the following circ*mstances:
- Total and permanent disability.
- Payments under a qualified domestic relations order (usually after a divorce).
- A series of substantially equal periodic payments.
- Amount of unreimbursed medical expenses above a percentage of adjusted gross income.
- Separation from service during or after the year the employee turns 55 (or 50 for public safety employees).
Keep in mind that if a withdrawal is eligible for one of the exceptions above, you won’t pay the 10% penalty. You will, however, pay income tax on the withdrawal if the contributions were made pretax.
401(k) withdrawals after age 59½
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn’t mean there are no consequences.
All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes. Income tax rates range from 10% to 37%, depending on your income. Therefore, the tax you’ll pay on your 401(k) withdrawals depends on how much you withdraw and your other income.
A 401(k) withdrawal could even push you into a higher tax bracket. Suppose you’re in the 24% marginal tax bracket but your income sits just below the top of the bracket. A large 401(k) withdrawal could push you into the 32% marginal tax bracket, meaning some of your income would be taxed at a higher rate.
Tip: A different tax treatment applies for contributions made to a Roth 401(k). Because you’ve already paid taxes on your contributions, your withdrawals after age 59½ are tax-free.
Not only can you take penalty-free withdrawals after age 59½, but the IRS will eventually require that you take them.
“With the recent Secure 2.0 legislation, the required distribution age is now 73 and increases to 75 in 2033,” says Philip Mock, a certified financial planner and founder of 1522 Financial.
In addition to changing the age for required minimum distributions from traditional 401(k) plans, the IRS is eliminating RMDs on Roth 401(k) plans beginning in 2024. This change puts Roth 401(k)s in line with rules regarding Roth individual retirement accounts.
RMDs are based on your 401(k) balance and a life expectancy factor determined by the IRS. These distributions allow the IRS to collect tax dollars on money that has been sitting tax-free in retirement accounts, possibly for many decades.
If you fail to take your RMDs or don’t withdraw enough, you could be subject to an excise tax equal to 50% of the amount not distributed.
Example: If your RMD is $20,000 and you take only $10,000, you will owe a 50% excise tax on the other $10,000, for a total tax liability of $5,000.
The only way to avoid RMDs is to keep working, which allows you to delay them.
“If you are still working at the company, you can continue to contribute at any age, and you are not required to take a required distribution,” Mock says. The exception to this rule is if you are a 5% owner of the company sponsoring the plan.
You could also roll the money over into an account that isn’t subject to RMDs like a Roth IRA, although doing so could have major tax consequences.
401(k) vs IRA
An IRA is another type of tax-advantaged retirement plan.
“A 401(k) and an IRA share a lot of similarities. Principally, they are both tax-deferred vehicles to save for retirement,” Mock says.
The key difference between a 401(k) and an IRA is that a 401(k) is an employer-sponsored plan, while anyone can open an IRA with a brokerage firm. IRA account holders can choose any investments the broker offers rather than those on a potentially limited menu the employer chose for its 401(k) plans.
IRAs have considerably lower contribution limits. In 2024, you can contribute only up to $7,000, or $8,000 if you’re age 50 or older, to an IRA. But you can contribute up to $23,000 to a 401(k), or $30,500 if you’re age 50 or older.
401(k)s and traditional IRAs are similar when it comes to their withdrawal rules. In both cases, you’ll pay a financial penalty for distributions before age 59½ unless certain exceptions apply. And both accounts require that investors start taking RMDs by age 73.
Converting your 401(k) to an IRA
Converting investments from your 401(k) to a traditional IRA won’t help you avoid the restrictions around age, such as paying a penalty for withdrawals before age 59½ or being required to start taking RMDs at 73.
However, IRAs do give you more control over your money, along with a greater number of investment options. Instead of being limited to the 401(k) administrator your employer chose, you can open an IRA with any broker that offers the accounts. You can also choose any investments rather than only those included on your employer’s menu of options.
Additionally, if you’ve left an employer (or several employers), it can be easier to keep track of your retirement funds when they’re all in one place rather than spread across several 401(k) plans.
There are two ways to roll your 401(k) funds into an IRA. The first is an indirect rollover, where your 401(k) institution sends a check addressed to you. You then deposit the check with your IRA custodian within 60 days. This route has a couple of downsides, however.
“Please note that if the entire amount is not deposited into the IRA, the difference will be deemed a taxable — and potentially penalizable — withdrawal,” Pavlatos says. “Additionally, when an indirect rollover is executed, the 401(k) institution is mandated to withhold 20% for taxes.”
The good news is that as long as you deposit the entire amount into your IRA within 60 days, you’ll get that 20% back when you get your tax refund.
The other way — and the simpler way — to roll over your 401(k) funds is to do a direct rollover. Using this method, the 401(k) and IRA custodians communicate directly to transfer the funds. The 401(k) administrator may issue a check made payable to your new account.
“In this situation, no taxes are withheld, and no penalties are applied,” Pavlatos says. “This is the most common and usually most favorable way to perform the rollover.”
Frequently asked questions (FAQs)
You can empty your 401(k) in a lump sum when you retire, but doing so may not be wise. First, you’ll have to pay income taxes on the full amount, which will eat into your distribution significantly. The money also will no longer grow tax-deferred in your 401(k). And having access to your full account balance could present more temptation to spend it.
There’s no age at which you can make 401(k) withdrawals tax-free unless the contributions were made post-tax, such as in the case of a Roth 401(k). In the case of a pretax 401(k), all withdrawals will be subject to income tax.
Your RMD at age 73 depends on your 401(k) balance and your age. The IRS provides a uniform lifetime table to help workers calculate their RMDs. You generally divide your total balance by a life expectancy factor that corresponds to your current age.
