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Key points

  • 401(k)s are intended for retirement savings, so the IRS generally prohibits withdrawals before age 59½.
  • The penalty for early distributions from 401(k)s is generally 10%, in addition to income taxes you’ll owe.
  • There are several ways to avoid the 401(k) early withdrawal penalty.

401(k)s are popular tax-advantaged retirement accounts. According to 2022 data from the , 69% of private industry workers have access to 401(k)s or similar plans.

Since 401(k) plans were designed with a specific purpose — retirement savings — workers must be at least 59½ to access funds. If you withdraw money before that, you’ll likely be on the hook for early withdrawal penalties.

The good news is there are ways to avoid this financial hit. 401(k) loans, rollovers and hardship withdrawals are among the ways to access money without being stuck with costly penalties. 

What is the penalty for early 401(k) withdrawals?

The IRS imposes an early distribution penalty of 10% on withdrawals from a 401(k) plan that occurs before you reach age 59½ unless you meet one of the exceptions (which we cover in-depth below).

“The general rule is that if you withdraw funds from your 401(k) plan before you reach retirement age, you’ll have to pay a 10% penalty on top of the taxes you will owe on the amount you withdraw,” said Varsha Subramanian, a certified public accountant at FlyFin, an AI tax service.

The 10% penalty applies to the entire amount you withdraw from your 401(k). For example, if you withdraw $100,000 from your account before you reach age 59½, you’ll pay an early distribution penalty of $10,000.

Taxes on 401(k) withdrawals

The early distribution penalty isn’t the only cost you’ll have to worry about when you withdraw funds early from your 401(k). You’ll also pay income taxes on your withdrawal. Taxes apply when you take money from a 401(k), regardless of whether it’s an early withdrawal.

The taxes you’ll pay on your 401(k) distributions depend on your income tax rate since these distributions are taxed as ordinary income. 

Income tax brackets for the 2024 tax year

TAX RATESINGLE FILERSMARRIED INDIVIDUALS FILING JOINTLYHEADS OF HOUSEHOLD
10%
$0 to $11,600
$0 to $23,200
$0 to $16,550
12%
$11,601 to $47,150
$23,201 to $94,300
$16,551 to $63,100
22%
$47,151 to $100,525
$94,301 to $201,050
$63,101 to $100,500
24%
$100,526 to $191,950
$201,051 to $383,900
$100,501 to $191,950
32%
$191,951 to $243,725
$383,901 to $487,450
$191,951 to $243,700
35%
$243,726 to $609,350
$487,451 to $731,200
$243,701 to $609,350
37%
$609,351 or more
$731,201 or more
$609,351 or more

 “It’s also important to note that an early withdrawal could push you into a higher tax bracket, which means you pay more tax on all your income,” Subramanian said. “And some states levy taxes on early 401(k) withdrawals. These possible tax consequences are reasons to consult a CPA before withdrawing early from your 401(k). It’s your life savings, after all.”

Avoid an early 401(k) withdrawal penalty

The 10% penalty on early withdrawals can be a major financial burden, especially on top of the income taxes you’ll owe. But there are a few ways to take money from your 401(k) before age 59½ and avoid the 10% penalty.

Hardship withdrawals

The federal government allows you to withdraw money from your 401(k) plan early if you can demonstrate an immediate and heavy financial need. Situations in which a hardship withdrawal may be allowed include:

  • Medical care expenses for you, your spouse or your dependents.
  • Costs related to the purchase of a principal residence, not including mortgage payments.
  • Tuition or other higher education expenses.
  • Payments to prevent eviction from your principal residence or foreclosure of that mortgage.
  • Funeral expenses.
  • Certain expenses to repair damage to your principal residence.

If you can demonstrate an immediate and heavy financial need, you can withdraw only enough money to fulfill that need. For example, if you need $5,000 to pay back rent, interest and fees to avoid eviction, you can withdraw only up to $5,000.

Note that some hardship withdrawals are subject to the 10% penalty, while others are not. To receive a penalty-free hardship withdrawal, you must qualify for one of the exceptions, which include:  

  • Death.
  • Total and permanent disability.
  • Unreimbursed medical expenses above 10% of adjusted gross income (AGI).
  • Payments made under a qualified domestic relations order.

Substantially equal periodic payments (SEPP)

The IRS allows you to withdraw funds from your 401(k) plan before age 59½ if you take a series of substantially equal periodic payments over your life expectancy. To use this exception, you must intend to keep withdrawing those equal payments. 

If you modify your SEPP before age 59½ or before the fifth anniversary of your first SEPP, whichever is later, you’ll be subject to the following:

  • A 10% tax on the total distributions in that calendar year.
  • A recapture tax equal to the 10% tax that would have been imposed for the prior years of the SEPP.
  • Interest.

Rule of 55

Under the Rule of 55, you can begin taking early 401(k) distributions without penalty if you leave your job at age 55 or older. This rule applies regardless of whether you were fired, laid off or quit your job.

401(k) loans

Many 401(k) plans allow you to take loans from your account, which you must pay back with interest over time. You won’t pay income taxes or the 10% penalty if you repay the loan.

There are a few requirements a 401(k) loan has to meet to help you avoid taxes and penalties:

  • It can’t exceed 50% of your vested account balance or $50,000, whichever is less.
  • It must be repaid within five years unless you use it to buy your main home.
  • It must be repaid in substantially level payments at least quarterly.

There are a few more things to remember before considering a 401(k) loan. First, if you fail to repay the loan on time, the unpaid amount is considered a distribution and is subject to taxes and penalties. 

According to Mindy Yu, director of investing at Betterment at Work, that’s not the only consideration.

“When taking out a loan, remember to consider that in some circumstances, you may not be able to contribute to your 401(k) until the loan is paid back, you must pay back the loan even if you leave the company, and there is also a forgone opportunity cost of not being invested in the market,” Yu said.

IRA rollovers

Another way to avoid the 401(k) early distribution penalty is to roll that money over into a traditional IRA or individual retirement account.

If you leave your current employer, the funds you have in your 401(k) don’t just disappear. Rolling over your balance is one of the options to keep the funds without incurring a penalty.

The money will still be tied up in a retirement account and can be subject to a 10% penalty if you withdraw it early. However, you can take advantage of additional early withdrawal exceptions, which include:

  • Qualified higher education expenses.
  • Qualified for a first-time home purchase.
  • Health insurance premiums while unemployed.

It’s important to note that traditional and Roth accounts are taxed differently. So when you convert a traditional 401(k) to a Roth IRA, you’ll owe taxes on the money you convert to secure tax-free withdrawals in the future. 

You’ll be subject to a 10% penalty if you withdraw converted funds within five years. But after those five years, you can withdraw your Roth IRA contributions — but not earnings — anytime tax and penalty-free. 

Also, in most cases, you won’t be able to roll over your 401(k) funds until you leave your job. The only exception is if your employer allows in-service rollovers.

Should you withdraw from your 401(k) early?

According to financial experts, the answer is usually no.

An early 401(k) withdrawal is generally not worthwhile because of the two losses it incurs: 

  • The 10% penalty.
  • The opportunity cost of the earnings that could have been made.

The money that you withdraw no longer has the opportunity to grow and compound. Imagine that you withdraw $25,000 from your 401(k). After taxes, the portion you get to keep will be considerably lower, especially if you have to pay the 10% penalty.

But what if you left that $25,000 in your account for another 25 years? If you have an annual return of 10%, that $25,000 would grow to more than $270,000.

“However, if you’re in a dire financial situation where you’ve exhausted all means — including your emergency funds — to cover your essential living costs or emergency expenses, an early 401(k) withdrawal might help you avoid going into debt,” Yu said.

In that case, Yu recommends using a hardship withdrawal if you qualify since you can avoid the 10% penalty. Once you’re back on your feet, restart your retirement contributions and work to replace what you withdrew.

What to do with your 401(k) when you leave a job

It may be tempting to withdraw money from your 401(k) when you leave a job. But remember that you’ll have to pay taxes and that 10% penalty. 

You can move the money into the account without incurring additional costs.

Rolling your 401(k) over to a new 401(k)

If you start a new job where your employer offers a 401(k) plan, you can roll your balance over to the new plan. You won’t pay income taxes or the 10% penalty on the funds.

Rolling your 401(k) IRA over to an IRA

Instead of rolling your money into a new 401(k) plan, you can choose to roll the money into an IRA. The rollover happens in two ways: 

  1. Doing a direct rollover. In this case, you won’t have to worry about anything except how to invest the money once it’s in your IRA.
  2. Having a check made payable to you. If you receive a check for the funds, you’ll have 60 days to deposit them into another tax-advantaged retirement account or risk being subject to income taxes and the 10% penalty.

Frequently asked questions (FAQs)

A couple of risks are associated with a 401(k) early withdrawal. On the front end, you’ll be subject to ordinary income taxes and a 10% penalty. But perhaps the bigger risk is the loss of the investment gains the money could have accrued had you left it in your 401(k) until retirement.

A 401(k) early withdrawal may be your best option if you’re facing a financial emergency and don’t have access to other funds. In that case, you may qualify for a hardship withdrawal that allows you to pull money from the account without the 10% penalty.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Erin Gobler

BLUEPRINT

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Her passion for teaching others about personal finance came from her own experience of learning to manage her money in a better way. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Hannah Alberstadt is the deputy editor of investing and retirement at 91Ӱ Blueprint. She was most recently a copy editor at The Hill and previously worked in the online legal and financial content spaces, including at Student Loan Hero and LendingTree. She holds bachelor's and master's degrees in English literature, as well as a J.D. Hannah devotes most of her free time to cat rescue.