A 401(k) is meant to support you in retirement, which is why withdrawing from it early usually comes at a cost. In most cases, the IRS charges a 10% penalty for taking funds out before age 59½, in addition to regular income tax on the amount you withdraw.

Still, life happens. If you're facing financial hardship or certain qualifying situations, you may be able to take money from your 401(k) without paying the early withdrawal penalty. Understanding your options can help you make an informed decision and avoid unnecessary fees.

How 401(k) Plans Work

A 401(k) is a tax-advantaged retirement account offered by employers, named after the section of the U.S. Internal Revenue Code that created it. These plans allow employees to contribute a portion of their paycheck into an investment account designed to grow over time.

Contributions are made through automatic payroll withholding, meaning your employer deducts a set amount from each paycheck and deposits it into your 401(k). Many employers also offer matching contributions, which help boost your retirement savings. The money in your account is typically invested in mutual funds, including stock and bond funds, or target-date funds based on your estimated retirement year.

Since employers set up and manage the 401(k) plan, they choose the investment options available. As an employee, you decide whether to participate, how much to contribute, and which available funds to invest in. Unlike pensions, 401(k) plans shift the investment risk to you, the employee, which means your retirement outcome depends on market performance and your investment decisions.

Traditional 401(k)s vs. Roth 401(k)s

A traditional 401(k) allows you to contribute pre-tax income, which reduces your taxable income for the year. Your investments grow tax-deferred, and you’ll pay taxes when you withdraw the money in retirement. Since withdrawals count as ordinary income, large distributions could push you into a higher tax bracket.

A Roth 401(k) works differently. You contribute after-tax dollars, so your withdrawals in retirement are tax-free as long as you meet the IRS requirements. Because you already paid taxes on your contributions, you can withdraw that portion at any time without penalty.

Some employers offer both types of accounts. Depending on your income, retirement goals, and expected tax bracket in retirement, you may choose one or use both to diversify your tax strategy.

Penalties on Early 401(k) Withdrawals

Withdrawing from your 401(k) before age 59½ typically results in a 10% early withdrawal penalty, on top of the regular income tax you’ll owe. The IRS uses this penalty to discourage people from dipping into their retirement savings too soon.

Still, life doesn't always go according to plan. If you find yourself in a tough financial situation, it's worth checking if you qualify for one of the IRS-approved exceptions that let you withdraw funds early without paying the 10% penalty.

You may avoid the penalty if your early withdrawal is due to one of the following situations:

• You become permanently disabled
• You have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
• You are ordered by a court to provide alimony or child support
• You experience a qualified disaster and take a distribution under special IRS relief
• You leave your job at age 55 or older (the “Rule of 55”)
• You take substantially equal periodic payments (SEPPs) based on IRS formulas
• You face certain expenses related to a birth or adoption (up to $5,000 per parent)

Keep in mind, while these exceptions eliminate the 10% penalty, you’ll still owe income tax on most withdrawals unless they come from a Roth 401(k). Always consult a financial professional before taking action, especially when it comes to your long-term retirement strategy.

How to Make 401(k) Withdrawals Without Penalties

While most early withdrawals from a 401(k) trigger a 10% penalty, you can avoid this fee if you qualify for an exception. The IRS recognizes a range of situations where early access to retirement savings is allowed without extra penalties, such as disability, certain medical costs, or job separation after age 55.

If you have a Roth 401(k), you may have even more flexibility. Because Roth contributions are made with after-tax dollars, you can withdraw your contributions at any time without taxes or penalties. However, withdrawing earnings from a Roth 401(k) before meeting IRS qualifications may still result in taxes and penalties.

The best way to access your 401(k) without penalties depends on your unique circumstances. Whether you’re facing unexpected expenses or planning a career change, review your options carefully and consider speaking with a financial advisor to avoid unnecessary costs.

The Rule of 55

The Rule of 55 allows you to withdraw funds from your 401(k) without a 10% early withdrawal penalty if you leave your job in the calendar year you turn 55 or later. This applies whether you retire, resign, or are let go. While you'll still owe regular income tax on withdrawals from a traditional 401(k), you won’t face the additional IRS penalty.

One important limitation is that the Rule of 55 only applies to the 401(k) associated with your most recent employer. If you have other 401(k) accounts from previous jobs, you won’t be able to access those without penalty unless you qualify under a different exception.

To maximize the benefits of the Rule of 55, you can roll over older 401(k) balances into your current employer’s 401(k) plan before leaving your job. Doing this can help you consolidate your retirement funds and take advantage of penalty-free withdrawals on the full amount.

Substantially Equal Periodic Payments

If you plan to retire early and you're younger than 55, you may still avoid the 10% early withdrawal penalty through a method called substantially equal periodic payments, or SEPPs. This approach allows you to take fixed annual withdrawals from your 401(k) without triggering penalties, as long as you follow IRS rules.

To qualify, you must take withdrawals for at least five years or until you reach age 59½, whichever period is longer. The IRS provides specific methods for calculating how much you can withdraw each year. Once you start SEPPs, you must stick to the schedule—changing or stopping the payments early can result in retroactive penalties.

If you're already 55 or older, SEPPs may not offer as much flexibility as the Rule of 55. Unlike the Rule of 55, which allows full access to your funds after separation from employment, SEPPs require you to continue taking distributions on a fixed schedule even after reaching 59½, unless the five-year minimum hasn’t been met.

401(k) Hardship Withdrawals

If you're facing serious financial difficulty, your 401(k) plan may offer a hardship withdrawal option. These withdrawals allow you to access funds early without needing to meet the standard age requirement, but they come with strict rules and limitations.

• Common reasons a hardship withdrawal may be allowed include:
• Medical expenses or health insurance costs
• Costs related to purchasing a primary residence
• Tuition or other educational fees
• Funeral and burial expenses
• Payments necessary to prevent foreclosure or eviction
• Urgent repairs for damage to your home

Not all 401(k) plans offer hardship withdrawals, and even those that do may limit which reasons qualify. You’ll also only be able to withdraw from your contributions, not from investment gains or employer matches.

In the past, the IRS required a six-month suspension on contributions after taking a hardship withdrawal. However, this restriction was lifted in 2020, allowing participants to continue saving even after taking an early withdrawal for hardship.

Required Minimum 401(k) Distributions

While many people focus on how to withdraw from a 401(k) early without penalties, waiting too long can also result in costly consequences. The IRS requires you to begin taking required minimum distributions (RMDs) once you reach a certain age. These rules ensure that retirement funds don’t grow tax-deferred forever.

Your required starting age for RMDs depends on your birth year. If you were born before July 1, 1949, you must have started RMDs at age 70½. If you were born between July 1, 1949 and December 31, 1950, your RMDs begin at age 72. For anyone born in 1951 or later, RMDs now start at age 73, and the age will increase to 75 for those who turn 74 after December 31, 2032.

You must take your first RMD by April 1 of the year following the year you reach the required age. After that, withdrawals must occur by December 31 each year. If you miss your deadline or take out less than required, the IRS may penalize you 50% of the amount you failed to withdraw.

To avoid mistakes, calculate your RMD ahead of time based on your account balance and life expectancy tables provided by the IRS. A Certified Financial Planner® can help ensure you meet your RMD deadlines and avoid unnecessary penalties.

Bottom Line

There are situations where taking an early withdrawal from your 401(k) may feel necessary—or even unavoidable. While tapping into your retirement savings should be a last resort, exceptions exist that can help you avoid costly penalties if you qualify.

It’s a good idea to talk to a Certified Financial Planner® (CFP) before deciding to take an early withdrawal. They may be able to help you find alternative assets to tap into, or another plan to preserve your retirement savings. If you do opt for an early withdrawal, you will want to make sure you actually qualify for an exception and that you avoid any penalties.

To make the most of your 401(k) and enjoy your best retirement outcomes, talk to a Certified Financial Planner® today.