401k Early Withdrawal Rules: Penalties and Exceptions

Taking money out of a 401k before you are 59½ is usually expensive. Before you do it, it helps to know exactly what it costs and which exceptions might apply.

The basic rule

If you take a distribution from a 401k before age 59½, two things normally happen:

The amount is added to your income for the year and taxed at your normal rates (for a traditional 401k).
You generally owe an extra 10% additional tax, often called the early withdrawal penalty.

So a $10,000 withdrawal at a 22% federal bracket could cost about $2,200 in federal tax plus $1,000 in penalty, before any state tax. You would keep roughly $6,800.

The 20% withholding

When a 401k pays you directly, the plan generally has to hold back 20% for federal income tax on most payments that could have been rolled over. That is a prepayment, not your final bill. You settle the actual tax, and any penalty, when you file your return. If your real tax is lower than 20%, you get the difference back. If it is higher, you owe more.

Exceptions to the 10% penalty

Some situations avoid the extra 10% tax. You still owe regular income tax on the money. Exceptions that apply to 401k plans include:

Leaving your job in or after the year you turn 55. This applies to the plan of the employer you left, not to old plans or IRAs. It is often called the "rule of 55".
Total and permanent disability.
Terminal illness.
Substantially equal periodic payments, a fixed schedule of payments over your life expectancy, with strict rules. For a 401k you must have left that employer first.
Medical expenses above 7.5% of your adjusted gross income, to the extent of the deductible amount.
Birth or adoption of a child: up to $5,000 per child, within a year of the birth or adoption.
Personal or family emergency expenses: up to $1,000 once per calendar year, since 2024. There are also limits on how soon you can use it again, so check the IRS notice linked below.
Domestic abuse victims, for distributions after 2023.
Court order. Payments to a former spouse under a qualified domestic relations order.
Death, where the money goes to your beneficiary.
Federally declared disasters, within the limits set for the disaster.

The list also includes some special rules for public safety workers and military reservists. The IRS page linked below has the full list.

Hardship withdrawals are different

Many plans allow a hardship withdrawal for an "immediate and heavy financial need". That lets you take money out when you would not normally be allowed to, but it does not remove the tax or the 10% penalty on its own. The penalty applies unless one of the exceptions above also covers you.

Cheaper options to check first

A 401k loan. If your plan allows it, a loan is not taxed or penalised as long as you repay it on time. See our guide to loans versus withdrawals.
A rollover. Moving money from one retirement account to another is not a withdrawal if you do it correctly.
Reducing the amount. Even a smaller withdrawal costs less tax and penalty.
Other sources. Compare the cost of a withdrawal with the cost of other ways to cover the need.

What you give up

The tax and penalty are only part of the cost. Money you take out stops growing. $10,000 left invested for 25 years at 6.5% a year could grow to about $48,000. Our early withdrawal calculator shows this next to what you would keep.

Reporting

You report the extra tax on your tax return, using Form 5329 unless your Form 1099-R already shows the right code. A tax professional can help you check whether an exception applies.

Try it yourself 401k early withdrawal penalty See what you would keep after tax and penalty. Open the calculator →

Sources

This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.