By Craig Eissler, CFP®, CIMA®, AIF®, PPC®, Wealth Advisor at Halbert Hargrove
Your 401(k) can be one of the best tools for building a secure retirement. But what happens if you need that money—before or after you retire? Maybe there’s an emergency, a big expense, or you’re just wondering if it’s okay to dip in early. While pulling funds might seem like an easy fix, it can potentially have serious consequences. Let’s look at the key considerations.
Key Takeaways About 401(k) Withdrawals
- 401(k) withdrawals follow strict IRS rules. Taking money before age 59½ usually triggers taxes and a 10% penalty, while later withdrawals affect taxable income and long-term savings.
- Early access comes with long-term costs. Withdrawing funds reduces future growth potential and can significantly impact retirement security, even when penalties are avoided.
- Alternatives may help protect your plan. Loans, hardship withdrawals, or other withdrawal options may offer flexibility—but every choice should be weighed carefully.
Why People Withdraw From Their 401(k)
Life happens—unexpected medical bills, a job loss, a home repair that can’t wait, or other major expenses can make dipping into your retirement savings feel like the only option. Before you act, it’s important to understand the rules set out by the IRS, and the long-term impact a withdrawal can have on your finances.
When Can You Withdraw From Your 401(k) Without Penalties?
- At what age are 401(k) withdrawals penalty-free? 59½. You’ll still owe ordinary income tax on pre‑tax withdrawals, but the extra 10% penalty goes away at this age.
- When can you withdraw from your 401k? It’s your money, and you can withdraw it at any time. Just keep in mind that there is a 10% penalty if you make a withdrawal before you are 59½, plus income taxes on the amount you’re taking out.
401(k) Withdrawals Before Retirement
Pros
- Access to Cash: Can be useful for emergencies or big expenses.
- No Repayment Required: Unlike a loan, you don’t have to pay it back.
- Avoid High-Interest Debt: Usually, better than racking up high-interest credit card or payday loan balances.
Cons
- Taxes and Penalties: If you’re under 59½, the early withdrawal penalty is 10%. There is an exception to the early withdrawal penalty called a hardship withdrawal, which I’ll explain below. In any case, you must pay income taxes on the amount of the withdrawal.
- Lost Growth: Once that money is out, it stops compounding tax-deferred.
- Possible Contribution Limits: Some plans pause contributions after a hardship withdrawal.
401(k) Withdrawals After Retirement
Pros
- Penalty-Free: After 59½, you can withdraw without the extra 10% penalty hit.
- Flexibility: Use funds for living expenses, travel, or healthcare.
- Required Minimum Distributions (RMDs): Starting at age 73, withdrawals are mandatory.
Cons
- Taxable Income: Unless it’s from a Roth account, withdrawals are taxed as ordinary income.
- Risk of Running Out: Large non-RMD withdrawals can shrink your nest egg too fast, and deplete that tax-deferred growth on money invested in your 401(k).
Other 401(k) Withdrawal and Usage Options
Before we dive into these alternative withdrawal options, it’s important to note that each employer’s 401(k) plan operates under its own set of rules.
Not all plans allow in‑service withdrawals, hardship distributions, or loans—and even when they do, eligibility can depend on factors like your age, your employment status, and how long you’ve been contributing.
Always review your plan’s Summary Plan Description (SPD) or consult your plan administrator to confirm what’s available to you.
In-Service Withdrawals
Some 401(k) plans let you take money out while still working—often after 59½. Many people use this to roll funds into an IRA for more investment choices. Income taxes generally apply, and penalties if you’re under 59½.
Hardship Withdrawals
For “immediate and heavy financial need” like medical bills, tuition, or preventing foreclosure. These are taxable and can’t be repaid—so your balance takes a permanent hit. But if you’re under 59½ and qualify for this type of withdrawal, you won’t be hit with a 10% penalty. For more information on what might qualify as a Hardship Distribution with the IRS, start here: FAQs regarding hardship distributions.
401(k) Loans
Borrow from your account and pay yourself back with interest. Limits are typically $50,000 or 50% of your vested balance. Pros: no credit check, and the interest and loan amount go back to your 401(k). Cons: missed growth and repayment risk if you leave your job.
Talk Through Your 401(k) Withdrawal With Us First
Pulling money from your 401(k) should be a last resort. We recommend exploring alternatives like emergency savings or personal loans. If you must withdraw, know the tax rules, penalties, and how it affects your long-term financial plan and financial security. Your HH advisor would be happy to walk you through the solutions that make the most sense for your circumstances.
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