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Most of us spend the majority of our adult lives planning for retirement, contributing funds to a retirement account, and even calculating when we’ll be ready to retire. Many Americans turn to a 401(k) plan offered by their employer as a primary way to save for those golden years.
But what happens when life doesn’t go as planned? Can you withdraw money from your retirement plan before you hit age 59½?
The answer is yes – but you’ll want to learn more about the conditions before withdrawing any of your contributions.
How Does a 401(k) Plan Work?
A 401(k) plan is a tax-advantaged retirement plan provided by many employers. Employees, and potentially their employer, contribute to their individual retirement plan, and contributed funds are placed in an investment portfolio, where they have the potential to compound over time.
401(k) plans may offer a wide variety of investment options. Individuals can build their portfolios based on their estimated retirement age, risk tolerance, and personal investment preferences. Most 401(k) plans may offer:
- mutual funds
- index funds
- exchange-traded funds (ETFs)
- individual stocks and bonds
- money market funds
Contributions are tax-deferred, meaning individuals are not taxed on their initial contributions. Instead, they will pay taxes when funds are withdrawn.
Most people choose to contribute a percentage of their income to their 401(k) plan, and some employers provide matching contributions up to a certain amount each year. Employers can withhold the designated amount from each paycheck and place it directly into the plan, which makes contributing to retirement savings easier.
The IRS determines contribution limits each year (for 2025, the limit is set at $23,500) along with penalty-free withdrawal requirements. If an individual withdraws money from their 401(k) account without meeting stipulations set by the IRS, they will face a 10% penalty.
5 Ways to Withdraw from Your 401(k) Penalty-Free
Looking for a way to withdraw from your 401(k) without incurring a 10% fee? Here are your options.
1. Reaching the Designated Age
Reaching age 59½ is the simplest way to withdraw from your 401(k) without worrying about penalties. However, the IRS rule of 55 may allow you to access your funds earlier.
If you lose or leave your job during the calendar year you turn 55, you can withdraw from your plan penalty-free. This rule only applies to your current 401(k) plan from your most recent employer – not all retirement plans in your name.
The rule of 55 applies even if you take another job. If you retire at age 55 and begin withdrawing from your 401(k), then decide to start a part-time job to stay busy a few years later, you can continue withdrawing from your plan as long as it’s active, meaning you haven’t rolled it over into a different retirement plan or account.
Keep in mind that you’ll need to begin taking required minimum distributions (RMDs) at age 72 or 73, depending on your age. Your RMD amount will depend on the value of your account.
2. Hardship Withdrawals
Sometimes, life surprises you with unexpected expenses. If you’re facing financial hardship, you may qualify for an early penalty-free withdrawal from your 401(k) plan. The IRS specifies that these withdrawals must be due to “an immediate and heavy financial need,” and the distribution must not exceed the amount of that need.
Common reasons for hardship withdrawals include:
- Medical care for yourself, your spouse, or your dependents
- Funeral expenses
- Funds to help you avoid foreclosure or eviction
- Home repairs that are not covered by insurance
- College tuition and fees for yourself, your spouse, or your dependents
If you aren’t sure if your expense qualifies for a hardship withdrawal, talk to your employer or a trusted financial advisor.
3. Disability, Terminal Illness, or Death
The IRS allows for early 401(k) distributions without penalty if you are or become terminally ill or if you are or become disabled. If you pass away and leave your 401(k) to a spouse, dependent, or designated beneficiary, they will have several options for withdrawing funds without penalty. They should consult their financial advisor to determine the best next steps.
4. Retirement Account Rollover
Perhaps you have funds left in a former employer’s 401(k) plan. If you’d like to leave money in that account, you can do so — but rolling over to a new account is an appealing option for many individuals.
Rollovers to new retirement plans avoid the 10% penalty if the rollover is completed within 60 days. If you roll over your old plan into a new 401(k) plan or a traditional IRA, you will not be subject to taxes. However, if you roll over the funds into a Roth IRA, you’ll need to pay income tax on the current amount. Once it’s in your Roth IRA, it will continue to accumulate and you will not owe taxes upon withdrawal after retirement.
5. Special Qualifications
The previous reasons listed above apply to everyone – but if you find yourself in one of these specific situations, you may also be eligible for penalty-free 401(k) withdrawal:
- You give birth to a child or adopt a child (withdrawal up to $5,000 permitted)
- You use the funds to pay an IRS levy
- You are in the military reserves and are called to active duty
- You are a survivor of domestic abuse
- You are mandated to divide your 401(k) funds in divorce proceedings
- You are a disaster relief victim
- You choose to take substantially equal periodic payments (SEPPs)
Determining if you are eligible for a special withdrawal qualification can be complex. Consult with a financial advisor you trust to help you make the best decision for your financial future.
Plan Well for Your Future
No matter what your future may bring, a solid financial plan can help you find security in the years ahead. At Marietta Wealth, we offer comprehensive financial advisory services that will help you navigate your plan from investments to retirement.
If you’re looking for a financial professional to help you navigate retirement planning, including the possibility of penalty-free 401(k) withdrawals, our advisors can help.
Get in touch with Marietta Wealth today to begin your journey toward financial security in the years ahead.
Marietta Wealth is a registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website.
This article is not intended to be used, and should not be used, as the sole basis for legal advice. The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.