401(k) Withdrawal: Penalties and Rules for Cashing Out Early
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A 401(k) plan is designated as a retirement account, which means cashing out 401(k) funds early can cost you: If you haven’t reached age 59 ½, an early 401(k) withdrawal could trigger penalties and taxes, as well as impact your retirement savings in the long term.
If you've decided that cost is worth it — and it may be, in some emergency scenarios — here's what you need to know. We'll also cover exceptions that might allow you to avoid a penalty.
What is the 401(k) early withdrawal penalty?
If you withdraw money from your 401(k) before age 59 ½, the IRS usually assesses a 10% tax as an early distribution penalty. This early withdrawal penalty is in addition to federal ordinary income taxes. On top of that, your withdrawal may be subject to state taxes, depending on where you live.
Can you make an early 401(k) withdrawal?
Yes. The tax and penalty on early withdrawals doesn't mean you can't take them — it just means you may lose some of your retirement savings to the government in the process.
However, the IRS does allow for penalty-free withdrawals in some situations, such as if the reason for the withdrawal qualifies as a hardship or certain other exceptions are met. We cover these in detail below.
Additionally, a provision in the Secure 2.0 Act allows for special emergency distributions of up to $1,000 per year beginning in 2024. You can withdraw the money penalty-free and repay it over three years. Within those three years, no other emergency distributions can be taken out of the account unless the amount has been repaid.
How 401(k) withdrawals could impact your long-term savings
Before making a withdrawal from your 401(k), use the calculator below to determine what you might potentially miss out on in the long-term. For example, if you have $50,000 in your 401(k) now, taking out $5,000 may not seem like too big of an impact. But that $5,000 distribution could mean missing out on about $16,000 in additional savings 20 years down the road.
Penalty-free exceptions for cashing out a 401(k) early
In certain situations, you may be able to withdraw from your 401(k) without incurring the 10% early distribution penalty.
401(k) hardship withdrawals
A hardship withdrawal is a withdrawal of funds from a retirement plan due to “an immediate and heavy financial need.” A hardship withdrawal is limited to the amount needed to meet that need and usually isn't subject to penalty.
Generally, these things qualify for a hardship withdrawal:
Medical bills for you, your spouse or dependents.
College tuition, fees, and room and board for you, your spouse or your dependents.
Money to avoid foreclosure or eviction.
Funeral expenses.
Certain costs to repair damage to your home.
To make a hardship withdrawal, first check with your employer's plan administrator to see if it's possible. They'll decide if you qualify, so you may need to explain why you can't get the money elsewhere.
When it comes to what you can withdraw, most plans typically allow for the withdrawal of 401(k) contributions and any matching contributions from your employer, but gains might be restricted (but double-check with your plan).
Income taxes may still apply for a hardship distribution. Additionally, you also may not be able to make 401(k) contributions for six months after a hardship withdrawal.
Other penalty-free exceptions
In addition to the Secure 2.0 Act provision, the IRS may waive the penalty if these scenarios apply:
You are terminally ill.
You become or are disabled.
You gave birth to a child or adopted a child during the year (up to $5,000 per account).
You rolled the 401(k) over to another retirement plan (within 60 days).
Payments were made to your beneficiary or estate after you died.
The money paid an IRS levy.
You were a victim of a disaster for which the IRS granted relief.
You over-contributed or were auto-enrolled in a 401(k) and want out (within certain time limits).
You were a military reservist called to active duty.
You leave your job. This works only if it happens in the year you turn 55 or later (50 if you work in federal law enforcement, federal firefighting, customs, border protection or air traffic control).
You have to divvy up a 401(k) in a divorce. If the court’s qualified domestic relations order in your divorce requires cashing out a 401(k) to split with your ex, the withdrawal to do that might be penalty-free.
You are a domestic abuse survivor. As of 2024, you can withdraw 50% of your account or $10,000 (indexed for inflation) if you self-certify that you experienced domestic abuse.
You choose to receive “substantially equal periodic” payments. Basically, you agree to take a series of equal payments (at least one per year) from your account. They begin after you stop working, continue for life (yours or yours and your beneficiary’s), and generally have to stay the same for at least five years or until you hit 59½ (whichever comes last). A lot of rules apply to this option, so be sure to check with a qualified financial advisor first.
401(k) to IRA conversions
Individual retirement accounts — known as IRAs — have slightly different withdrawal rules from 401(k)s. You might be able to avoid that 10% 401(k) early withdrawal penalty by converting an old 401(k) to an IRA first. For example:
There’s no mandatory withholding on IRA withdrawals. That means you might be able to choose to have no income tax withheld and thus get a bigger check now. (You still have to pay the tax when you file your tax return.) If you’re in a desperate situation, rolling the money into an IRA and then taking the full amount out of the IRA might be a way to get 100% of the distribution. This strategy may be valuable for people in low tax brackets or who know they’re getting refunds. (See what tax bracket you're in.)
You can take out up to $10,000 for a first-time home purchase. If that's why you need this cash, converting to an IRA first may be a better way to access it.
School costs could qualify. Withdrawals for college expenses could be allowed from an IRA if they fit the IRS definition of qualified higher education expenses.
Consider the costs of cashing out your 401(k)
“Anytime you take early withdrawals from your 401(k), you’ll have two primary costs — taxes and/or penalties — which will be pretty well defined based on your age and income tax rates, and the foregone investment experience you could have enjoyed if your funds remained invested in the 401(k). This total cost should be considered in detail before making early withdrawals,” says Adam Harding, a certified financial planner in Tempe, Arizona.
It's a good rule of thumb to avoid making a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he adds.
Even if you manage to avoid the 10% penalty, you probably will still have to pay income taxes when cashing out 401(k)s. Plus, you could stunt your retirement.
