401(k) withdrawal: When and how to avoid costly mistakes

A 401(k) withdrawal happens any time you remove funds from your employer-sponsored retirement plan, whether you’re years from retiring or already using those savings to support it. If you make a withdrawal before age 59½, you’ll usually owe income tax plus a 10% early withdrawal penalty — unless you qualify for a specific exception. 

Read on to learn more about 401(k) withdrawals, including when you can withdraw money, how to avoid penalties, and what documentation you’ll need. We’ll also show you key ages for retirement access and what happens if you take a loan or leave your job early. 

When can you withdraw from a 401(k)?

You can’t access your 401(k) the same way you would a savings or checking account, especially while you’re still working for the employer that sponsors it. To protect your account balance and encourage long-term planning, the IRS limits access to your retirement funds until you reach certain milestones or face specific life events. It may be best to seek professional advice from a tax professional before considering your options and implications of your choices.:

• Reaching age 59½: The 401(k) withdrawal age of 59½ unlocks penalty-free access to your retirement account. This means you can remove funds without the 10% withdrawal penalty, but you’ll have to pay taxes on regular income.
• Separation from service: If you leave your job because of retirement, a new opportunity, or a layoff, you’re allowed to withdraw from that employer's 401(k). Early withdrawal penalties, taxes and rollover requirements still apply. 
• Plan termination: When an employer shuts down a 401(k), you have the option to take a distribution (taxes and penalties may still apply) or rollover into an individual retirement account (IRA).
• Disability: If you’re permanently unable to work due to a disability, you can take 401(k) withdrawals without a penalty as long as you satisfy IRS requirements.
• Death: A designated beneficiary takes control of the 401(k) following the account holder’s death. How and when the beneficiary can make withdrawals depends on their relationship to the original owner.
• RMDs: Required Minimum Distributions (RMDs) are mandatory withdrawals that start at age 73. The IRS requires RMDs so it can eventually tax your earnings.

How to withdraw from a 401(k)

While each retirement plan is a little different, most 401(k) withdrawals follow the same process. Here’s how to access funds from your own retirement account.

Confirm your plan permits the distribution type

Make sure your 401(k) allows the withdrawal you’re considering so your plan administrator won’t deny your request. Not every plan offers every option, and the rules can vary from one employer to the next. Common distribution types include:

• In-service withdrawal: Removing retirement funds while you’re still employed
• Termination withdrawal: Withdrawing money after leaving your job or being laid off
• Hardship withdrawal: Accessing funds early if you have an immediate financial need
• 401(k) loans: Borrowing from your own retirement account to repay later on

Contact HR/plan administrator and request forms

Get in touch with your company’s HR team or the plan administrator listed on your 401(k) statements. They can help you understand your options by explaining which withdrawal types are available and what fees or restrictions apply. You’ll also receive the necessary forms or online instructions to begin the process. 

Gather required documentation

Before you submit your request, check that you have the documents needed to verify your identity and eligibility. This usually includes a government-issued ID and your Social Security number. If you’re requesting a hardship withdrawal, you’ll also need proof, such as medical bills, a foreclosure notice, or tuition statements.

Complete distribution/loan paperwork 

You’ll need to fill out the forms with details about how much you want to withdraw and where the funds should go. You can choose direct deposit, mailed as a physical check, or rolled over into another retirement account like an IRA. You’ll also choose how much to withhold for federal and state taxes (if necessary).

Receive funds and know tax reporting

Once approved, your plan administrator will send the withdrawal or loan funds. You’ll receive a Form 1099-R at tax time showing the total withdrawn and taxes withheld. For withdrawals subject to the 10% penalty, you’ll have to fill out Form 5329 with your tax return.

401(k) withdrawal age

Understanding the following key ages for 401(k) withdrawals helps you plan for your financial future and avoid penalties:

• Age 59½: You can take distributions without paying the early withdrawal penalty, though regular income tax applies. 
• Age 55: If you leave your job at age 55 or older, the Rule of 55 lets you access that employer’s 401(k) without the early withdrawal penalty. But this only applies to the account from the job you just left, not older retirement plans. 
• Age 60 to 63: These years are ideal for retirement planning. You’re past the age of 59½, so you can remove money without penalties, and it’s a good time to figure out how those withdrawals will support you until Social Security begins.
• Age 73: Once you turn 73, you need to withdraw RMDs from most retirement accounts, unless you’re still working for the employer and don’t own more than 5% of the company.

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

While you can withdraw money from a 401(k) before retirement, it triggers ordinary income tax plus the 10% early withdrawal penalty. However, there are some exceptions:

• Rule of 55: You can withdraw from your 401(k) without the penalty if you leave your job at 55 or older. The Rule of 55 only applies to the 401(k) tied to your current employer. This rule does not apply if the funds are rolled over to an IRA. The 401(k) also must allow for these early withdrawals. 
• Substantially equal periodic payments: These are fixed distributions you receive regularly for at least five years or until you reach age 59½, whichever is longer.
• Disability: The IRS allows penalty-free withdrawals if you are permanently disabled. You’ll still owe income tax on the withdrawals.

401(k) withdrawal penalty

Removing funds from a 401(k) before age 59½ triggers two costs. You’ll pay ordinary income tax on the amount you withdraw, and a 10% early withdrawal penalty unless you meet an exception. For example, if you’re in the 22% federal income tax bracket and make an early withdrawal of $25,000, you’d pay:

• Income tax: $25,000 x 22% = $5,500
• 10% penalty: $25,000 x 10% = $2,500
• Total federal liability: $5,500 + $2,500 = $8,000
  

In this scenario, you’d end up with about $17,000 after taxes and penalties. If you didn’t have that $8,000 withheld, you will owe it when it comes time to file your tax return. 

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FAQs

When can I draw from my 401(k) without penalty?

You can withdraw money without a 10% penalty once you reach age 59½. You might also qualify for penalty-free distributions if you leave your job at 55 or older or meet certain hardship withdrawal exceptions.

What is the 10% early withdrawal penalty, and are there exceptions?

The 10% penalty is an additional tax on early distributions that the IRS charges if you remove retirement funds before age 59½. There are some exceptions that let you avoid the 10% penalty via a hardship withdrawal. These can include steep medical bills or the threat of foreclosure.

How does a 401(k) loan work, and what are the risks if I change jobs?

A 401(k) loan lets you borrow from your account balance and repay it with interest, usually through payroll deductions. But if you leave your job before the loan is paid back, the remaining account balance could be treated as a taxable withdrawal and subject to the 10% penalty.

Take the next step with Gainbridge

Withdrawing from your 401(k) is tempting when you’re under financial stress, but this move could derail your long-term savings if you’re not careful. Gainbridge can help you grow your money without getting into your account too early. Our licensed agents will walk you through your options and answer all your questions along the way. We can also help you navigate how to rollover your 401(k) to a Gainbridge annuity if that is something you are considering. 

Explore Gainbridge today and see how their different types of annuities can help you protect your retirement savings.

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This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional.  The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

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