As you approach age 59½, you’ll have the option to withdraw money from your 401(k) without paying an early withdrawal penalty. However, there are some exceptions to this rule. You can withdraw money from your 401(k) without penalty if you:
* Are disabled
* Have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
* Need to pay for higher education expenses for yourself, your spouse, or your children
* Are taking a loan from your 401(k)
* Are making a qualified reservist distribution
* Are experiencing a financial hardship
* Are separating from service in the military
If you withdraw money from your 401(k) before age 59½ and do not qualify for any of the exceptions listed above, you will have to pay a 10% early withdrawal penalty.
Age-59½ Rule
The Age-59½ Rule is an Internal Revenue Service (IRS) regulation that prohibits individuals from withdrawing funds from their 401(k) retirement accounts before reaching age 59½ without incurring a 10% early withdrawal penalty. This rule is in place to encourage individuals to save for retirement and avoid raiding their accounts prematurely.
There are certain exceptions to the Age-59½ Rule, which include:
- Substantially equal periodic payments
- Disability
- Medical expenses
- First-time home purchase
- Qualified reservist distributions
- Certain educational expenses
If an individual withdraws funds from their 401(k) account before reaching age 59½ and does not qualify for an exception, they will be subject to a 10% early withdrawal penalty. This penalty is calculated on the amount of the withdrawal, not just the earnings. For example, if an individual withdraws $10,000 from their 401(k) account before age 59½, they will be subject to a $1,000 early withdrawal penalty.
In addition to the 10% early withdrawal penalty, individuals who withdraw funds from their 401(k) account before reaching age 59½ may also be subject to income tax on the amount of the withdrawal. This is because withdrawals from 401(k) accounts are taxed as ordinary income.
| Withdrawal Exception | Description |
|---|---|
| Substantially equal periodic payments | Payments must be made for at least five years and must be equal in amount |
| Disability | Must be totally and permanently disabled |
| Medical expenses | Must exceed 7.5% of adjusted gross income |
| First-time home purchase | Must be used to purchase a principal residence |
| Qualified reservist distributions | Must be called to active duty for more than 179 days |
| Certain educational expenses | Must be used to pay for tuition, fees, and other educational expenses |
401k Withdrawal Without Penalty at Age 55
Depending on your circumstances, you may be able to withdraw funds from your 401(k) without incurring a penalty fee if you are at least:
- Age 59½
- Terminated from your job due to a “qualified severance plan” (see below)
Qualified Severance Plan
A qualified severance plan is a formal agreement between you and your employer that provides for the payment of severance benefits upon termination of employment. To qualify as a “qualified severance plan,” the plan must meet certain requirements, including:
- The plan must be established in writing.
- The plan must be funded by the employer.
- The plan must provide for the payment of severance benefits to employees who are terminated due to a reduction in workforce.
- The plan must not discriminate in favor of highly compensated employees.
If you receive a severance payment from a qualified severance plan, you may be able to withdraw funds from your 401(k) without incurring a penalty fee. However, you must generally wait until you are age 55 to make a withdrawal without penalty. The 10% early withdrawal penalty does not apply to funds that you receive from a qualified severance plan if you are at least age 55 by the end of the calendar year in which you receive the distribution.
In addition, you may need to pay income taxes on the amount of the withdrawal. Please consult with a tax advisor or financial professional for guidance on your specific situation.
What Age Can You Withdraw From 401(k) Without Penalty?
In general, you can withdraw money from your 401(k) without paying a 10% early withdrawal penalty if you are at least 59½ years old. However, there are a few exceptions to this rule. You can also avoid the penalty if you:
- Retire and receive a lump sum distribution from your 401(k)
- Become disabled
- Have certain medical expenses
- Need money to pay for college tuition or other qualified education expenses
- Are a first-time homebuyer and use the money to buy a home
Roth 401(k) Withdrawals
If you have a Roth 401(k), you can withdraw your contributions at any time without paying taxes or penalties. However, you will have to pay taxes on any earnings you withdraw before you reach age 59½. Qualified Roth 401(k) distributions are tax-free and penalty-free. To be eligible for a qualified distribution, you must meet one of the following requirements:
- Be age 59½ or older
- Be disabled
- Be a first-time homebuyer and use the money to buy a home
- Have certain medical expenses
- Retire and receive a lump sum distribution from your 401(k)
The table below summarizes the rules for 401(k) and Roth 401(k) withdrawals.
| 401(k) | Roth 401(k) | |
|---|---|---|
| Minimum age for penalty-free withdrawals | 59½ | 59½ |
| Exceptions to the early withdrawal penalty | Disability, certain medical expenses, qualified education expenses, first-time homebuyer expenses | Disability, certain medical expenses, qualified education expenses, first-time homebuyer expenses |
| Taxes on withdrawals before age 59½ | Income tax and 10% early withdrawal penalty | Income tax only |
| Taxes on qualified withdrawals | Income tax only | No taxes |
72(t) Substantially Equal Payments
The 72(t) rule allows you to withdraw money from your 401(k) without paying the 10% early withdrawal penalty, even if you’re under age 59½. To qualify, you must take substantially equal periodic payments from your account for at least five years or until you reach age 59½, whichever is longer.
Substantially Equal Payments
- The payments must be made at least annually.
- The amount of each payment must be calculated using one of the following methods:
- Fixed amortization method: The payments are based on your account balance and life expectancy.
- Required minimum distribution method: The payments are based on your account balance and the IRS’s life expectancy tables.
- Annuity method: The payments are based on an annuity contract.
Exceptions
- You can stop taking payments if you become disabled or if your account balance falls below $100,000.
- If you change jobs, you can continue taking payments from your old 401(k) account or roll it over to a new account.
Penalties for Failure to Take Substantially Equal Payments
If you fail to take substantially equal payments, you will be subject to the 10% early withdrawal penalty on the amount of the withdrawals that exceed the substantially equal payments.
| Method | Calculation |
|---|---|
| Fixed amortization method | Payments are based on your account balance and life expectancy. |
| Required minimum distribution method | Payments are based on your account balance and the IRS’s life expectancy tables. |
| Annuity method | Payments are based on an annuity contract. |
Well, folks, there you have it! Now you know all about the nitty-gritty of 401(k) withdrawals. Remember, it’s always wise to consult with a financial advisor before making any significant financial decisions. But for now, I’ll let you go and start planning your withdrawal strategy. Thanks for sticking around! If you have any more burning money questions, be sure to swing by again soon. Cheerio!