401(k) Withdrawal Rules and the Early-Withdrawal Penalty
Withdraw from a traditional 401(k) before age 59½ and you generally owe a 10% early-withdrawal penalty on top of ordinary income tax. From 59½ there's no penalty (income tax still applies), and at 73 required minimum distributions begin.
Below are the age rules, the exceptions that waive the 10% penalty, how withdrawals are taxed, and the loan and hardship options.
The age rules
Three ages govern a traditional 401(k):
| Age | What applies |
|---|---|
| Before 59½ | 10% penalty + income tax (unless an exception applies) |
| 59½ and older | No penalty — income tax only |
| 73 and older | Required minimum distributions begin |
Exceptions to the 10% penalty
You can avoid the 10% penalty (though not the income tax) in several cases:
- Rule of 55 — leave your job in or after the year you turn 55, then withdraw from that employer's plan penalty-free.
- 72(t) / SEPP — substantially equal periodic payments that must continue for 5 years or until 59½, whichever is longer.
- Total and permanent disability, or death of the account owner.
- Unreimbursed medical expenses above 7.5% of AGI, or an IRS levy.
- Birth or adoption (up to $5,000) and domestic-abuse distributions (up to $10,000).
How withdrawals are taxed
Traditional 401(k) withdrawals are taxed as ordinary income, and the plan withholds a mandatory 20% on distributions that aren't rolled over. Roth 401(k) withdrawals are tax-free once you're 59½ and the account is at least five years old. Compare keeping versus spending a balance with the 401(k) spend-it-or-save-it calculator.
Loans and hardship withdrawals
A 401(k) loan lets you borrow up to 50% of your balance (max $50,000) and repay yourself with interest — but leave your job and an unpaid balance can become a taxable distribution. A hardship withdrawal covers an immediate heavy need; it's taxed and may still carry the penalty unless an exception applies. Weigh borrowing with the should-you-borrow-from-a-401(k) calculator.
What happens when you leave a job
Your 401(k) is yours to keep. You have four options: leave it in the old plan, roll it to your new employer's plan, roll it to an IRA, or cash out — which means income tax plus the 10% penalty if you're under 59½, usually the worst choice.
For a rollover, use a direct (trustee-to-trustee) transfer: the money moves between institutions, so there's no tax, no 20% withholding and no deadline. An indirect rollover pays you first — the plan withholds 20%, and you have 60 days to deposit the full amount (replacing that withheld 20% from other cash) or the shortfall is taxed and penalized.
At what age can I withdraw from my 401(k) without penalty?
At 59½. Before then a 10% early-withdrawal penalty applies on top of income tax, unless you qualify for an exception. After 59½ you owe only income tax.
What is the 401(k) early-withdrawal penalty?
It is 10% of the amount withdrawn, charged in addition to the ordinary income tax, on most distributions taken before age 59½ from a traditional 401(k).
What is the rule of 55?
If you leave your job in or after the calendar year you turn 55, you can take withdrawals from that employer’s 401(k) without the 10% penalty. It does not apply to IRAs or to plans from earlier employers.
How are 401(k) withdrawals taxed?
Traditional 401(k) withdrawals are taxed as ordinary income, with a mandatory 20% withholding on non-rollover distributions. Qualified Roth 401(k) withdrawals are tax-free after age 59½ and five years.
What is a 72(t) or SEPP withdrawal?
It is a series of substantially equal periodic payments that lets you tap a 401(k) or IRA before 59½ without the 10% penalty. The payments must continue for five years or until you reach 59½, whichever is longer.
Can I borrow from my 401(k) instead of withdrawing?
Often yes — up to 50% of your balance or $50,000. You repay yourself with interest and owe no tax, but if you leave your job an unpaid balance can be treated as a taxable distribution.
What happens to my 401(k) when I leave my job?
You can leave it in the old plan, roll it into your new employer’s plan or an IRA, or cash it out. Cashing out before 59½ triggers income tax plus the 10% penalty, so a direct rollover is usually the better move.
What is the difference between a direct and indirect rollover?
A direct rollover moves money straight between institutions — no tax, no withholding, no deadline. An indirect rollover pays you first with 20% withheld, and you must redeposit the full amount within 60 days or owe tax and a penalty on the shortfall.