401(k) Withdrawal

The rules for retirement plans, such as a 401(k), are designed to help you keep your savings in the plan until you retire. Many of the 401(k) withdrawal rules apply to all plans, but the business owner or employer sponsoring the 401(k) has some flexibility in deciding when and how the money will be paid out.

The withdrawal rules will be listed in each employer’s plan document and in the summary plan description employees receive when they enroll in their 401(k) plan.

401(k) withdrawal timing rules

If you’re saving in a 401(k), you generally cannot take your money out of the 401(k), unless you’ve:

  • Reached age 59½
  • Left the employer
  • Become disabled
  • Passed away (in which case your beneficiaries must begin taking withdrawals)

These “distribution events” apply to employees and business owners alike. Most plans, however, allow you to access your savings early through hardship distributions and loans.

You may only withdraw amounts from a 401(k) that you are vested in. “Vesting” means ownership.

You are always 100% vested in the salary deferral contributions you make to your plan. Employer contributions (e.g., matching or profit-sharing contributions) may be subject to a vesting schedule that requires the employee to work for the employer for up to six years to become fully vested in the employer contributions made to the employee’s account. If an employee leaves the employer before becoming 100% vested, the unvested portion of employer contributions in their account will be forfeited back to the plan.

After you have a distribution event, you can take all of your vested account balance out of the plan (called a lump sum distribution). Some plans allow partial payouts or installment payments, such as a specific dollar amount each year or each quarter. Some plans allow you to convert your retirement savings into an annuity, which is designed to pay out your account balance in a steady stream of payments over your lifetime.

401(k) withdrawal tax rules

The tax impact of your 401(k) withdrawal depends on the types of contributions you or your employer made to your account.

Pretax 401(k) contributions

If your 401(k) contributions are deducted from your paycheck before income taxes have been withheld, you are making pretax contributions. They are excluded from your taxable income at the time they are deducted from your paycheck and contributed to the 401(k). Because they were not taxed when they went into your 401(k) account, you must include them and any investment earnings in your taxable income when you take them out of your 401(k) account.

Employer contributions

Employers may take a tax deduction for the matching and profit sharing contributions they make to your 401(k) account. Because this money was not taxed when it went into the 401(k), you must include it and any investment earnings in your taxable income when you take it out of your 401(k) account.

Roth 401(k) contributions

Some employers allow employees to make Roth contributions to the 401(k) plan. If your 401(k) contributions are deducted from your paycheck after income taxes have been withheld, you are making Roth contributions. These contributions are made on an after-tax basis because they were included in your taxable income for the year you contributed them to your 401(k). When you take these funds out of the 401(k), you will not pay tax on them again. They are distributed tax-free. The earnings portion of a Roth 401(k) withdrawal will also be tax-free if it is “qualified.”

A withdrawal is qualified if you have had a Roth account for at least five years, and the distribution is taken after you reach age 59½, have died, or have become disabled. If you take a “nonqualified” Roth 401(k) withdrawal, the earnings must be included in your taxable income in the year you withdraw them from the plan.

401(k) tax withholding

If your 401(k) withdrawal is eligible to be rolled over to an IRA or other retirement plan but you choose to take it in cash, 20% of the taxable amount of the withdrawal will be withheld and sent to the IRS as a pre-payment of the income tax owed on the withdrawal. This means that you will receive 20% less than the full distribution amount.

Some types of withdrawals, such as those you are required to take (i.e., when you reach age 72) are not eligible to be rolled over. If a withdrawal is not eligible to be rolled over, it is subject to a lesser rate of withholding and you may elect to waive that withholding.

401(k) early withdrawals

To further discourage use of retirement savings before retirement, the tax laws impose an additional 10% tax on withdrawals made prior to age 59½. The 10% tax applies to the taxable portion of a withdrawal. The early withdrawal tax, sometimes called a penalty, is waived for certain reasons. Some of the reasons the 10% early withdrawal tax will be waived include:

Exceptions to 401(k) early withdrawal penalty:

  • You stopped working for the employer sponsoring the plan after reaching age 55
  • Your former spouse is taking a portion of your 401(k) under a court order following a divorce
  • Your beneficiary is taking a withdrawal after your death
  • You are disabled
  • You are removing an excess contribution from the 401(k)
  • You are taking a series of equal payments that meet certain rules under the tax laws
  • You are withdrawing money to pay unreimbursed medical expenses that exceed 10% of your adjusted gross income

401(k) hardship withdrawals and loans

Your 401(k) plan may allow you to access your savings while you are still working. The two most common ways to do this are through a hardship withdrawal or a loan.


A hardship withdrawal may be taken when the employee or business owner has an urgent financial need. Most plans allow withdrawals for the following types of financial hardships:

  • Certain medical expenses
  • Purchase of a principal residence
  • Tuition and related educational fees
  • Preventing eviction or foreclosure on principal residence
  • Funeral expenses
  • Repair of certain damages to a principal residence

Most plans require the employee to stop contributing to the plan for six months following a hardship distribution. Hardship distributions are taxable and subject to the 10% early withdrawal penalty unless an exception applies.


Most 401(k) plans allow the business owner and employees to take loans from their 401(k) balances. 401(k) loans are generally paid back to the plan account, with interest, through payroll deductions.

Taking 401(k) distributions in retirement

The 401(k) withdrawal rules require you to begin depleting your 401(k) savings when you reach age 72.

At this point, you must take a “required minimum distribution” each year until your account is depleted. If you are still working for the employer beyond age 72, you may be able to delay required minimum distribution until you stop working if your plan allows this delay. The delay option is not available to you if you own 5% or more of the business.

You have until April 1 of the year after you turn 72 to take your first required minimum distribution. After that, you must take a minimum amount by December 31 each year. Your 401(k) plan administrator will tell you how much you are required to take each year.

The amount is based on your life expectancy and your account balance. If you don’t take your required minimum distribution each year, you will have to pay a tax of 50% of the amount that should have been taken but was not. If you participate in more than one employer plan, you must take a required minimum distribution from each plan.