Opening up a 401k is an exciting step to take in your financial journey. It typically means you’re a step closer to retirement, and it could even mean that your employer is rewarding you for your hard work by contributing money to your 401k plan. There are many potential benefits to setting up a 401k, but these benefits come along with a host of questions like, “how much money should I have saved in my 401k?” and “what are my financial responsibilities after I retire?”

But one of the most common questions is: “when can I take money out of my 401k?” Whether you’re itching to chase sunsets and say farewell to your 9-5, or you just need funds to help cover unexpected expenses, it’s important to consider the restrictions and recommendations surrounding 401k withdrawals.

When you’re able to withdraw money from your 401k depends on your plan administrator, your financial circumstances, and the IRS. Yes, the IRS. That is, if you want to access the money that’s rightfully yours without incurring a penalty fee…

The IRS Rule of 55 says that any employee who is laid off, fired, or unable to fulfill job duties due to permanent disability between the ages 55 and 59 ½ is entitled to withdraw money from their 401k without penalty from the IRS. However, soon-to-be retirees should keep in mind that their plan administrator may charge a penalty for early withdrawal. The Rule of 55 only applies to 401k plans through your current employer, not if you opened a 401k with a former employer and then quit and started a different job following your 55th birthday.

Withdrawing before age 59 ½  

If these do not apply to you, you will be subject to the IRS’ standard 401k withdrawal rules. Most withdrawals taken out before age 59 ½ will be subject to a 10% penalty fee from the IRS, on top of the income tax imposed on your retirement plan.

However, there are a few exceptions where the 10% penalty fee may be waived upon early withdrawal, depending on what you need to withdraw funds for. These circumstances include: 

 

  • Medical Expenses or Insurance
  • Family Circumstances
  • Education
  • Buying Your First Home

 

Withdrawing after age 59 ½ 

If you choose to wait until you’re 59 ½ to withdraw money from your 401k, your hard-earned funds will likely benefit from the wait. Depending on your employment status, you may be able to access your 401k funds without penalty.

  • If you are retired, you can withdraw money from your 401k account without having to pay a penalty tax.
  • If you are still working, you may access your 401k funds from an old 401k account, but not from one that’s issued by your current employer.

Withdrawing after age 70 ½ 

If you wish to wait until you’re 70 ½ or older, the IRS will require that you start withdrawing minimum amounts from your 401k annually—this is also known as required minimum distribution (RMD). This number is based on the balance of your retirement fund, your life expectancy, and your age.

Wrapping Up: 401k Withdrawals

Use this guide to help you determine the right time to withdraw from your 401k according to IRS standards and your personal finances. Need help breaking down IRS 401k rules? Our team is happy to help you navigate RMDs, IRS tax laws, and more. Contact us for a free tax consultation today!