Table of Contents

Withdrawing from a 401(k) in retirement

Understanding 401(k) early withdrawals

Types of 401(k) hardship withdrawals

401(k) loan options

The bottom line



10 Ways to Make Withdrawals From Your 401(k)

10 Ways to Make Withdrawals From Your 401(k)

Feb 10, 2022


5 min read

Facing a costly hardship may make investors feel inclined to take out money from their 401(k) before they turn 59 ½, the age the IRS begins allowing withdrawals, penalty-free.

Life is full of unexpected events—some for the better, and some for the worse. If faced with a potentially costly hardship such as foreclosure or medical bills, investors may feel pressed to make an early withdrawal from their 401(k). For those considering an early withdrawal but concerned about triggering penalties, here’s what to keep in mind.

Withdrawing from a 401(k) in retirement

Under the IRS’ 401(k) withdrawal rules, investors can begin making withdrawals after they turn 59 ½. All distributions are subject to ordinary income tax.  

As with a traditional IRA, once investors turn 72, they need to begin taking what’s known as required minimum distributions, or RMDs, from their 401(k). In 2020, president Donald J. Trump enacted the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which notably raised the age for RMDs from 70 ½ to 72.

The IRS offers a worksheet to calculate RMDs, and account holders can use an online RMD calculator to verify 401(k) withdrawal rules after 59. The IRS Uniform Lifetime Table can help individuals determine how much they need to withdraw each year.

Understanding 401(k) early withdrawals

If an account holder takes withdrawals from their 401(k) before age 59½, they may incur penalties in the form of additional taxes. The additional tax for taking an early withdrawal from a tax-advantaged retirement account is 10% on top of any applicable income taxes.

The 10% early withdrawal tax may be waived if the account owner withdraws 401(k) funds in order to pay for certain qualified expenses, however.

Types of 401(k) hardship withdrawals

A hardship withdrawal is defined by the IRS as a withdrawal that is “necessary to satisfy an immediate and heavy financial need.” Account holders are expected to exercise all other available options to meet their financial need before dipping into their 401(k), and after a hardship withdrawal is made, they cannot defer income into their account for 6 months.

The IRS allows hardship withdrawals for the following reasons, but plans may vary in what they permit. Some hardship withdrawals do come with income tax and the 10% penalty, some do not.

Hardship withdrawals allowed with no penalty:

  1. Coronavirus-related distributions.

    In response to economic hardships caused by the pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. This allowed those adversely impacted by the pandemic to take up to $100,000 in early withdrawals from certain retirement plans without penalty—so long as those withdrawals were made between January 1, 2020 and December 30, 2020. Investors can repay all or part of their coronavirus-related distributions, provided they make the payment within three years of receiving the distribution.

  2. Medical expenses.

    Investors can make withdrawals to cover unreimbursed medical expenses that accounted for more than 7.5% of their adjusted gross income (AGI). These won’t incur the 10% penalty tax on the amount the investor spent beyond 7.5% of their AGI.

  3. Birth or adoption of a child.

    Under the SECURE Act, employees can withdraw up to $5,000 from a retirement plan to cover the birth or adoption of a child, penalty-free.

  4. Permanent or total disability.

    Those who become permanently and totally disabled are allowed to make hardship withdrawals, penalty-free. The distribution must be reported as income.

  5. Rule of 55.

    Individuals can withdraw funds from their current job’s 401(k) without penalty so long as they leave that job in or after the year they turn 55. Though distributions are subject to income tax, it does not matter whether the individual was laid off, fired, or quit. Employers must agree to the withdrawal, however, and may require employees to make a lump-sum withdrawal, which could translate to higher taxes.

Hardship withdrawals allowedwith taxes and penalty:

  1. Educational expenses.

    Investors may qualify for a hardship withdrawal to cover the costs of higher education (tuition, room and board, fees) for themselves, their spouse, children, or grandchildren.

  2. Purchase of principal residence.

    Investors may be eligible to withdraw up to $10,000 to help finance the purchase of their first home.

  3. Prevention of eviction or foreclosure.

    Those struggling to keep up with their mortgage or rent payments may be eligible for hardship withdrawals.

  4. Home repairs.

    Individuals repairing a home damaged by a storm, fire, or flood may qualify for hardship withdrawals.

  5. Medical insurance premiums when unemployed.

    Account holders can access 401(k) funds to pay for health insurance while they are unemployed.

401(k) loan options

Wondering how to withdraw from a 401(k) without penalty? One option investors have at their disposal is to borrow against their 401(k). Certain rules apply, and the loan must be:

  • No more than 50% of one's assets or $50,000, whichever is less
  • The loan must be repaid according to a fixed schedule
  • (Usually) the account holder must be actively employed by company sponsoring the 401(k)

Rules for taking a 401(k) loan vary from plan to plan. So investors may consider reviewing the rules, especially if they cannot (or do not intend) to pay their loan according to schedule. Keep in mind, an unpaid loan balance can have serious tax consequences, with treatment similar to a hardship withdrawal.

The bottom line

Facing a costly hardship such as foreclosure or job loss may make investors feel inclined to take out money from their 401(k) before they turn 59 ½, the age the IRS begins allowing withdrawals, penalty-free. If they decide to take an early withdrawal or even borrow against their 401(k) account, they must consider the consequences.

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