*NOTE: if you’re looking for information about the CARES Act withdrawal, see the article 401k Distributions Due to Coronavirus (CRDs) for more details.
When hard times befall you, you may wonder if there is a way withdraw money from your 401k plan. In some cases you can get to the funds for a hardship withdrawal, but if you’re under age 59½ you will likely owe the 10% early withdrawal penalty. The term 401k is used throughout this article, but these options apply to all qualified plans, including 403b, 457, etc.. These rules are not for IRA withdrawals (although some are similar) – see the article at this link for 19 Ways to Withdraw IRA Funds Without Penalty.
Generally it’s difficult to withdraw money from your 401k, that’s part of the value of a 401k plan – a sort of forced discipline that requires you to leave your savings alone until retirement or face some significant penalties. Many 401k plans have options available to get your hands on the money (like a hardship withdrawal), but most have substantial qualifications that are tough to meet.
Your withdrawal of money from the 401k plan will result in taxation of the withdrawal, and if you do not meet one of the exceptions, a penalty as well. See the article Taxes and the 401k Withdrawal for more details about how the taxation works.
In addition to withdrawing money from a 401k plan, many plans offer the option to take a loan from your 401k. This can be a better alternative than the withdrawal. A loan is often the only way you can access the money in a 401k if you’re still employed by that company. The article at this link explains the differences between a 401k loan and a 401k withdrawal.
The list below is not all-inclusive, and each 401k plan administrator may have different restrictions or may not allow the option at all.
We’ll start with the obvious methods, all of which generally require the plan participant to leave employment:
1. Normal – Begin after age 59½ after leaving employment at any age
3. Age 50 Exception – Begin after age 50, having left employment after age 50 from a job in a public safety profession, such as police, firefighters or emergency medical services for a governmental unit
4. Required Minimum Distributions – technically this one is covered by #1 above for most circumstances, but sometimes RMD is required of a person who has inherited a 401k, regardless of age.
5. Death – If you die, your beneficiaries are able to take distributions from your 401k without penalty.
6. Disability – If you are “totally and permanently disabled” by IRS definition, you may be able to take distributions from your 401k without penalty.
Now we’ll move into some of the not-so-obvious methods, starting with SOSEPP.
This is the classic Section 72t (IRC Section 72(t)) method for early withdrawal exceptions to the penalty. Essentially you agree to continue taking the same amount from your plan for the greater of five years or until you reach age 59½. There are three methods of SOSEPP:
7. Required Minimum Distribution method – uses the IRS RMD table to determine your Equal Payments.
8. Fixed Amortization method – in this method, you calculate your Equal Payment based on one of three life expectancy tables published by the IRS.
9. Fixed Annuitization method – this method uses an annuitization factor published by the IRS to determine your Equal Payments.
Section 72(t) provides additional methods for premature distribution exceptions which can occur before leaving employment (if the plan allows):
10. High Unreimbursed Medical Expenses – for yourself, your spouse, or your qualified dependent. If you face these expenses, you may be allowed to withdraw a limited amount (the actual expenses minus 10% of your AGI) without penalty.
11. Corrective Distributions of Excess Contributions – under certain conditions, when excess contributions are made to an account these can be returned without penalty.
12. IRS Levy – when the IRS levies an account for unpaid taxes and/or penalties, this distribution is generally not subject to penalty.
And lastly, here are a few additional ways that you can withdraw your 401k funds without penalty:
13. Auto-Enrollment – within time limits, when you are automatically enrolled in a 401k plan and you do not wish to be enrolled, permissive distributions may be allowed without penalty.
14. Qualified Reservist – If you were called to duty after September 11, 2001 and serve for at least 6 months, you may be allowed to make a withdrawal from your 401k during your active duty period without penalty.
15. Divorce – If a Qualified Domestic Relations Order (QDRO) is drafted as part of a divorce decree with the order to assign or divide and assign a portion of the assets of your 401k plan with your former spouse, this withdrawal is penalty-free
16. Roth IRA or Roth 401k Conversion – when you convert your funds from a 401k plan to a Roth IRA or Roth 401k, although you pay tax on the distribution, there is no 10% penalty applied. Usually you must have left employment to enact a conversion to Roth IRA, but not a Roth 401k.
17. (a bonus!) Birth or Adoption – With the passage of the SECURE Act of 2019, a new qualified exception is now available – to offset expenses for the birth of a child or an adoption. Each taxpayer may withdraw up to $5,000 (within one year of the birth or when the adoption is finalized) to pay for expenses associated with a birth or adoption. You are not allowed to take the distribution prior to the birth of the child or the adoption is finalized, only after the fact. You also have the option of paying this back (rules for the payback are still being developed at this time).
*18. (2020 bonus!) CARES Act withdrawal – With the passage of the CARES Act in early 2020, there is a new option available for 401(k) withdrawal without penalty: If you are impacted by COVID-19 (and the list of impacts is pretty comprehensive), you can withdraw up to $100,000 from your 401(k) plan in 2020 without penalty. Plus you can waive the standard 20% withholding, and furthermore, you can spread out the tax burden over three years (2020, 2021 & 2022). On top of that, you have the option of repaying (rolling back) the withdrawal at any point during those same 3 years.