Americans are saving more in their 401(k) plans than ever before. The average savings rate in 401(k) plans at Fidelity Investments rose to a record high 14.3% in the first quarter of 2025.
Eventually, the time will arrive for you to withdraw that money. Before you do so, it’s important to know the rules. Some withdrawals come with penalties. Others can add to your tax bill.
If you’re considering taking money out of your 401(k), find out what you need to know so you can avoid costly mistakes.
What a 401(k) Withdrawal Really Means
Depending on your age and account type, the timing of a 401(k) withdrawal matters a lot. Understanding your options now can help you avoid making decisions that may lead to regrets later.
If you are 59½ or older, a 401(k) withdrawal is a relatively straightforward event. You simply make the withdrawal, paying any required taxes.
Things change if you make a withdrawal before that age. This is known as an early withdrawal, and it can trigger both taxes and penalties.
The savings in a 401(k) account are meant to grow over time and support you when you stop working. But some people younger than 59½ look to their 401(k) nest egg when a financial emergency hits and nothing else seems within reach.
More people are making emergency 401(k) withdrawals. A report from The Vanguard Group found that 4.8% of workers with 401(k) plans that allow hardship withdrawals took money out early to cover emergencies during 2024.
Although the money is yours, withdrawing it isn’t always simple. In fact, doing it at the wrong time or for the wrong reason can be costly.
When Can You Take Money Out of Your 401(k) Without a Penalty?
In most cases, you can take money out of your 401(k) without a penalty once you reach age 59½.
However, if you withdraw the money before that age, the Internal Revenue Service (IRS) typically will deem it an early withdrawal, which can trigger taxes and penalties.
These include a 10% penalty, which the IRS defines as an “early withdrawal tax.” And that’s before income taxes take another slice of the pie.
This early withdrawal rule is in place to encourage long-term saving, and the penalty is designed to make you think twice before withdrawing from your retirement savings. That said, life doesn’t always follow the rules, and there may be valid reasons to take the money sooner.
So, if you’re thinking of using your 401(k) funds early, it’s worth checking if your situation fits an exception that allows you to avoid the penalty.
According to the IRS, these are just a few of the situations where the penalty might not apply on an early withdrawal:
- Permanent disability
- Unreimbursed medical expenses that exceed 7.5% of your income
- Buying a home for the first time (up to $10,000)
- Leaving your job after age 55 (the so-called “rule of 55”)
You can find a full list of exceptions at the IRS website.
The Rule of 55 lets you take penalty-free withdrawals from your current employer’s 401(k) or 403(b) if you leave your job in or after the year you turn 55. Regular income taxes still apply, but the 10% early withdrawal penalty is waived.
Note: These rules eliminate the early withdrawal penalty, not the income taxes. If you’re thinking about an early withdrawal and aren’t sure which rules apply to you, check with the IRS or talk to a tax professional.
What Happens If You Withdraw From Your 401(k) Too Early
If you’re facing unexpected expenses and it feels like there’s no way out, it’s tempting to consider tapping into your 401(k) for a quick fix. But taking cash out before retirement age usually means you will lose money overall.
Between penalties and taxes, your withdrawal could cost more than you think.
If you take money out before age 59½ and don’t qualify for an exception, you’ll be charged a 10% early withdrawal penalty. On top of that, the amount you withdraw gets added to your taxable income for the year. So you could end up paying much more than expected.
Let’s say you withdraw $10,000 early. In such a situation, you would likely owe:
- $1,000 for the penalty
- Depending on your income bracket, as much as $2,000 to $2,500—or even more—in federal and possibly state taxes
That can mean around one-third of your money is gone before you even touch it.
Taking money early also means reducing the power of long-term growth and compounding interest. That hit can set back your long-term savings goals and make it harder to stay on track for retirement.
This is why many financial experts recommend leaving your 401(k) untouched unless you absolutely have no other choice.
Providers Who Offer Flexible Features Still Emphasize Caution
Many plans allow early access to 401(k) money under certain conditions. But remember, penalties and income taxes can still apply if you’re not careful.
There are options where the 10% penalty may not apply, such as hardship withdrawals, taking out a loan and the “rule of 55.” These options may allow you to access your retirement savings without penalty.
But even in these situations, income taxes can still apply. And by withdrawing money, you still risk sacrificing investment gains that you would have enjoyed had you left the money alone.
Tip: Always investigate whether your reason for withdrawing money will qualify you for a penalty-free exception. If so, it could save you hundreds, or even thousands, of dollars.
How Much Tax Do You Pay on a 401 (k) Withdrawal?
Every dollar you withdraw from a traditional 401(k) is potentially added to your taxable income. The amount you pay in taxes on a 401(k) withdrawal depends partially on your total income and tax bracket. The more you take out, the higher your potential tax bill.
Let’s say you earn $40,000 a year and you withdraw $10,000 from your 401(k). That $10,000 gets added to your income. So, now you’ll be taxed on $50,000. If you live in a state that also taxes income, you may owe state tax as well.
The withdrawal might even push you into a higher tax bracket, especially if your income is already near the cutoff. That’s why some people choose to space out their withdrawals over multiple years to avoid a bigger tax hit.
Tip: Many 401(k) plan providers will automatically withhold 20% of your withdrawal for taxes. But that may not be enough. Come tax season, you could owe more or get some of it back, depending on your total income.
Plan ahead. If you need $8,000 for bills, you may have to request $10,000 just to cover the taxes and penalties.
Withdrawing From a Roth 401(k): Different Rules, Different Outcome
If you have a Roth 401(k), the rules change a bit. With a traditional 401(k), you pay taxes when you take the money out. But with a Roth 401(k), you pay taxes when you put the money in, so withdrawals are usually tax-free later.
You can access the money you’ve contributed without penalty only if you’re at least 59½ and have had the account for at least five years.
That’s because Roth accounts are designed to reward long-term saving and discourage early spending. Pulling out earnings too soon may trigger taxes or even a 10% early withdrawal penalty. This is called a non-qualified withdrawal. But once you meet both age and time rules, the withdrawals are usually completely tax-free.
Example: If you started your Roth 401(k) five years ago and you’re now 60, you can likely withdraw your full balance without taxes or penalties. That makes the Roth a flexible tool for long-term retirement savings, especially when tax planning is a concern.
How to Withdraw Money From Your 401(k) After You Retire
Once you hit retirement age, withdrawing from your 401(k) becomes easier and provides you with more flexibility than before. You’re no longer hit with early withdrawal penalties, which gives you more freedom in how and when you take money.
Most plans let you request a lump sum, monthly payments, or transfers directly into your bank account. The key is choosing a method that fits your monthly needs without draining your savings too quickly.
Some retirees set up automatic withdrawals to make monthly budgeting easier. It works like a paycheck, giving them a steady income and peace of mind. Others take out larger amounts at once to pay for big expenses like home repairs or medical bills.
Either way, understanding your withdrawal options helps avoid mistakes that could shrink your savings faster than planned. You may also need to plan around taxes, as traditional 401(k) withdrawals and non-qualified Roth 401(k) withdrawals count as regular taxable income.
Of course, you can just leave the money sitting there, at least until you turn 73. At that point, you will have to make required minimum distributions (RMDs) if you have a traditional 401(k) account.
RMDs are based on your age and account balance, both of which change as the years roll on. Missing an RMD can lead to steep fines, which is why many people schedule their RMDs at the start of the year and double-check with their provider to ensure compliance.
How Long Does a 401(k) Withdrawal Take to Process?
Most 401(k) withdrawals are processed within five to 10 business days after the request is approved. That timeline can vary depending on your provider, the method of withdrawal — such as paper check or direct deposit — and whether additional documentation is needed.
Some providers offer faster options for emergencies, especially if you’re requesting a hardship withdrawal. But even then, you may need to submit documentation to prove the hardship, such as medical bills or eviction notices.
Keep in mind that delays can happen, especially during holidays or if paperwork is incomplete. So, it’s better to submit your request early and double-check everything to avoid stress or missed payments.
Tip: Before requesting a withdrawal, check your plan’s specific policies and make sure your contact details and banking information are up to date. Timing matters if you’re relying on that money to cover urgent bills or rent.
Conclusion
A 401(k) withdrawal can be a simple affair once you turn age 59½. The key is to try to do so in a tax-efficient manner.
Things change if you withdraw money early, as this can trigger taxes and penalties. Still, if an early withdrawal is your best option, understanding the rules can help you make the withdrawal in a way that does the least damage to your long-term finances.
