401(k) Withdrawals: Penalties & Rules for Cashing Out a 401(k)

After age 59½, the IRS allows penalty-free withdrawals. But what if you want to make an early 401(k) withdrawal?
June Sham
Elizabeth Ayoola
By Elizabeth Ayoola and  June Sham 
Updated
Edited by Sheri Gordon Reviewed by Raquel Tennant

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Nerdy takeaways
  • You can make a 401(k) withdrawal at any age, but doing so before age 59½ could trigger a 10% early distribution tax, on top of ordinary income taxes.

  • Some reasons for taking an early 401(k) distribution are penalty-free, such as a hardship withdrawal or if you leave your job.

  • Converting a 401(k) to an IRA could be a way to keep your funds and avoid the early distribution penalty.

MORE LIKE THISTaxesInvesting401(k)

Need your 401(k) money right now? If you haven’t reached age 59½, an early 401(k) withdrawal could trigger penalties and taxes, as well as impact your retirement savings in the long term. But if you’re considering tapping into your retirement funds, here’s what you need to know.

Can you withdraw money from a 401(k) early?

Yes, it’s possible to make an early withdrawal from a 401(k) plan at any time and for any reason. Some withdrawals might qualify as hardship withdrawals and be penalty-free, but in many cases, taking money out of a 401(k) plan will still trigger taxes.

According to Vanguard, one of the largest 401(k) plan providers, about 3.6% of its plan participants initiated a hardship withdrawal in 2023. That was up from 2.8% in 2022

Vanguard. How America Saves 2024. Accessed May 8, 2024.
.

» Crunch the numbers with our 401(k) early withdrawal calculator

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What is the 401(k) early withdrawal penalty?

If you withdraw money from your 401(k) before you’re 59½, the IRS usually assesses a 10% tax as an early distribution penalty. That could mean giving the government $1,000, or 10% of a $10,000 withdrawal, in addition to paying ordinary income tax on that money. Between the taxes and penalty, your immediate take-home total could be $7,000 from your original $10,000.

Reasons for penalty-free early 401(k) withdrawals

In certain situations, you may be able to withdraw from your 401(k) without incurring the 10% early distribution tax penalty. 

If any of these situations apply to you

Generally, the IRS will waive the early distribution tax penalty if these scenarios apply:

  • You choose to receive “substantially equal periodic” payments. Basically, you agree to take a series of equal payments (at least one per year) from your account. They begin after you stop working, continue for life (yours or yours and your beneficiary’s) and generally have to stay the same for at least five years or until you hit 59½ (whichever comes last). A lot of rules apply to this option, so be sure to check with a qualified financial advisor first.

  • You leave your job. This works only if it happens in the year you turn 55 or later (50 if you work in federal law enforcement, federal firefighting, customs, border protection or air traffic control).

  • You have to divvy up a 401(k) in a divorce. If the court’s qualified domestic relations order in your divorce requires cashing out a 401(k) to split with your ex, the withdrawal to do that might be penalty-free.

  • You are a domestic abuse survivor. As of 2024, you can withdraw 50% of your account or $10,000 (indexed for inflation) if you self-certify that you experienced domestic abuse

    Senate.gov. SECURE 2.0 Act of 2022. Accessed Nov 6, 2023.
    .

  • You are terminally ill.

  • You become or are disabled.

  • You rolled the account over to another retirement plan (within 60 days).

  • Payments were made to your beneficiary or estate after you died.

  • You gave birth to a child or adopted a child during the year (up to $5,000 per account).

  • The money paid an IRS levy.

  • You were a victim of a disaster for which the IRS granted relief.

  • You over-contributed or were auto-enrolled in a 401(k) and want out (within certain time limits).

  • You were a military reservist called to active duty.

Finally, a provision in the Secure 2.0 Act allows special emergency distributions of up to $1,000 per year beginning in 2024. You can withdraw the money penalty-free and repay it over three years. Within those three years, no other emergency distributions can be taken out of the account unless the amount has been repaid.

If you qualify for a hardship withdrawal

A hardship withdrawal is a withdrawal of funds from a retirement plan due to “an immediate and heavy financial need.” A hardship withdrawal is limited to the amount needed to meet that need, and usually isn't subject to penalty

Internal Revenue Service. Hardships, Early Withdrawals and Loans. Accessed May 8, 2024.
.

Generally, these things qualify for a hardship withdrawal:

  • Medical bills for you, your spouse or dependents.

  • College tuition, fees, and room and board for you, your spouse or your dependents.

  • Money to avoid foreclosure or eviction.

  • Funeral expenses.

  • Certain costs to repair damage to your home.

How to make a hardship withdrawal

Your employer’s plan administrator usually decides if you qualify for a hardship withdrawal. You may need to explain why you can’t get the money elsewhere. You usually can withdraw your 401(k) contributions and maybe any matching contributions your employer has made, but not normally the gains on the contributions (check your plan). You may have to pay income taxes on a hardship distribution, and you may be subject to the 10% penalty mentioned earlier.

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If you are converting your 401(k) to an IRA

Individual retirement accounts — known as IRAs — have slightly different withdrawal rules from 401(k)s. You might be able to avoid that 10% 401(k) early withdrawal penalty by converting an old 401(k) to an IRA first. For example:

  • There’s no mandatory withholding on IRA withdrawals. That means you might be able to choose to have no income tax withheld and thus get a bigger check now. (You still have to pay the tax when you file your tax return.) If you’re in a desperate situation, rolling the money into an IRA and then taking the full amount out of the IRA might be a way to get 100% of the distribution. This strategy may be valuable for people in low tax brackets or who know they’re getting refunds. (See what tax bracket you're in.)

  • You can take out up to $10,000 for a first-time home purchase. If that's why you need this cash, converting to an IRA first may be a better way to access it.

  • School costs could qualify. Withdrawals for college expenses could be OK from an IRA, if they fit the IRS definition of qualified higher education expenses

    Internal Revenue Service. Qualified Education Expenses. Accessed May 8, 2024.
    .

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Consider the costs of cashing out your 401(k)

“Anytime you take early withdrawals from your 401(k), you’ll have two primary costs — taxes and/or penalties — which will be pretty well defined based on your age and income tax rates, and the foregone investment experience you could have enjoyed if your funds remained invested in the 401(k). This total cost should be considered in detail before making early withdrawals,” says Adam Harding, a certified financial planner in Tempe, Arizona.

It's a good rule of thumb to avoid making a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says.

Even if you manage to avoid the 10% penalty, you probably will still have to pay income taxes when cashing out 401(k)s. Plus, you could stunt your retirement.

» Run your retirement numbers with our retirement calculator

Frequently asked questions

Depending on who administers your 401(k) account, it can take between three and 10 business days to receive a check after cashing out your 401(k). If you need money in a pinch, it may be time to make some quick cash or look into other financial crisis options before taking money out of a retirement account.

If you make an early withdrawal of your 401(k), you’ll probably receive less cash than you might expect due to penalties, fees and withholdings. With fewer funds left in the account, you’ll also likely be missing out on future returns. An early 401(k) withdrawal calculator could help you estimate how much you might receive by tapping into retirement funds early.

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