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What Happens if I Withdraw My 401(k) Early?


A 401(k) is a company-sponsored retirement plan that gives employees a tax break on the portion of their salary they contribute to the plan. Contributions are automatically withdrawn and invested in funds of the employee’s choosing, and employers have the option to match contributions. 401(k) plans are designed for retirement savings. Early withdrawal of funds carries heavy penalties under normal circumstances. 

How Soon Can You Withdraw 401(k) Funds Without Penalty?

You can begin withdrawing funds from a 401(k) without penalty at the minimum retirement age – 59 ½. However, there is an exception known as the Rule of 55. If you are fired, laid off, or voluntarily leave your job at age 55 or older, the IRS will allow you to access your 401(k) funds without penalty. To receive penalty-free distributions, you must leave your job in the year you turn 55 or later. The Rule of 55 does not apply to a 401(k) from a previous employer, only the plan from your current job. 

What Are the 401(k) Early Withdrawal Penalties?

401(k) contributions are tax-deferred. You don’t pay income tax on those funds until you begin taking distributions, typically at age 59 ½ or later. If you begin withdrawing funds before you are 59 ½ years old (or 55 years old under the Rule of 55), the IRS imposes a 10% early withdrawal penalty in addition to income tax. This penalty can take a large bite out of your retirement funds. 

Are There Exceptions for COVID-19?

Under the CARES Act of 2020, 401(k) investors affected by the virus are allowed to withdraw up to a certain amount of their 401(k) funds without paying early withdrawal penalties. Qualified individuals may access up to $100,000 of their retirement savings without the 10% penalty, and they are granted an expanded window for paying income tax on the funds they withdraw. People impacted by the pandemic are also allowed to pay back the funds they withdrew over a three-year period, with tax deferral on the payback amounts. 

At What Age Are You Required to Withdraw Funds from a 401(k)?

You are not allowed to keep money in a 401(k) account forever. The government imposes required minimum distributions – the minimum amount you must withdraw from your retirement savings every year. In most cases, you must begin taking distributions when you turn 70 ½. But if your 70th birthday came after June 30, 2019, you are not required to start withdrawing from your 401(k) until you reach age 72. 

You may withdraw more than the minimum amount if you choose. Withdrawals will be included in your taxable income. Consequences are severe if you fail to take the required minimum distribution. There may be a 50% excise tax on the amount that was not distributed as required. 

IRS requirements for 401(k) and other retirement plans can be complicated. If you have questions about 401(k) withdrawals, speak with our friendly agent. We can help you avoid penalties for early withdrawal or failing to make the required minimum distributions.

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