You work, you save, you retire – it’s the American way, right?

But what happens when you have done a good job saving and get to be one of the lucky ones to retire early – are you still subject to the IRS rules of being age 59 1/2  before you can touch your money?

(Side rant: what the heck is up with the IRS and these 1/2 ages anyway? This concludes my rant.)

If you are stressed about having to pay the 10% early withdraw penalty, don’t freak out just yet.

The IRS – believe it or not – does allow methods to withdraw funds from your 401k without penalty.  Just make sure you follow the rules before you claim your prize.

A few notes before hand…

  1. You always have the option to take a 401k loan (if your plan allows it).  Does that mean you should take it?  I’m hoping that you have ample emergency funds that you can tap first. Stated another way and more blunt: You BETTER have enough emergency funds. Got it? If not, make sure you know the 401k hardship withdrawal rules.
  2. Before you make any withdraws at of your 401k, do more than just read this post.  Consult your financial advisor and/or tax professional to make sure you have your bases covered.

Another thing, the methods shared below allow you avoid the 10% penalty, but they do not….I REPEAT… not prevent you from having to pay the tax.   Now that we have that taken care of, let’s see how you can withdraw funds from your 401k penalty free….

1. A Visit From The Grim Reaper

Okay, I’m sure that death is probably not the option that you wanted to hear.  I guess technically you don’t benefit.  Rest assure that your family will benefit in that they can use your retirement funds to cover burial expenses and supplement other income needs now that you’re not around.   Just make sure to update your beneficiaries << you have been warned.

2. Qualifying Disability

If you have been deemed to be disabled either buy an insurance company or Social Security, then you are entitled to withdraw from your 401k penalty free.  You’ll have to provide a disability letter to your 401k custodian to verify your status and avoid the penalty.

3. Medical Bills

How to Withdraw Funds from 401k Without Penalty

A visit to the emergency room can add up really quick nowadays.  Our middle son banged his head on our bathroom doorway and we found that out really quick.  CHA-CHING!  If you don’t pay them, next thing you know you have debt collectors hounding you.   To avoid the penalty a few things have to occur:

  1. Withdraw Same Year. You have to take the money out in the same year you incurred the medical bills.
  2. 7.5% Rule. Take 7.5% of your AGI (Adjusted Gross Income) and that’s the to the extent that the unreimbursed medical bills that you’ll be allowed to claim penalty free from your 401k.

On a side note, it is not required to itemize your deductions to qualify for this.  If you don’t know what that means, then you better pay somebody to do your taxes for you.

And if you think that I had to tap my 401k to pay for my son’s emergency room visit, get your head out of the gutter.

4. Disaster Relief

With all the storms and flooding that have hit the U.S. recently, it’s a comfort knowing that if your area is deemed for disaster relief you can tap your 401k for necessary expenditures.

5. 55 and Separated From Service

According to the IRS, those that retire early or force out may have access to their 401k early.   This is their wording:

“Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55”

You can take a distribution from a qualified defined contribution plan, i.e. 401(k), and avoid the 10% penalty. A couple key things to note on doing this is that it must be from the 401(k), 457 or 403(b), to avoid the 10% penalty. This actually happened to my father in law as his company went through a buyout and he was offered an early retirement package at the age off 55.  We ended up taking a distribution from his 401k to have some cash on hand and then rolled the rest into his IRA.

Don’t miss this important point: DO NOT roll over to an IRA if you think you may need some money.

If you have already done a 401(k) rollover into a traditional IRA, you have already missed this opportunity. Once you hit the IRA and you take a withdrawal, you are then assessed a 10% penalty.  Rolling to an IRA might make sense later on, but until you know for sure – don’t do it.

6. Stay Equal and Periodic With 72t

Another more complex strategy – that I’m not very fond of – is the little know rule of 72(t).  Why am I not fond of it?  Because 1. it locks you in for long time and 2. it’s too complicated for most.

What is the rule 72(t)?  The rule of 72(t) states that withdrawals from your 401k have to be “substantially equal periodic payments. You must use one of the three methods that the IRS has determined and then take your payment on a set schedule for a specific time period. It is required that you take those payments for either 5 years or when you turn 59 1/2 , whichever comes later.

Example of 72(t)

Let’s say you retire at the age of 53 and you elect to do 72(t) then you must take equal payments for 7 years.  If you happen to need more money during that 7 years stretch, then you’ll have to go back and pay the 10% penalty on everything taken out to that point.   Now do you see why I’m not a big fan?

If you start later on, say 56, then you’ll have to take it for 5 years till the age of 61 even though you’ve already hit 59 1/2.

401k Penalty Free Withdrawals

As you can see, there are ways to tap your 401k penalty free.  Just make sure you follow the rules.


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Comments | 48 Responses

  1. Kevin H says

    I would also suggest contacting the administrator of the Plan that your account is in. Each plan parameters are different and may or may not allow for the distributions listed. Steidle Pension Solutions handles my company’s plan. They took over the administration when my previous TPA could not clearly explain our plan distribution rules and parameters. I appreciate knowing that representatives who specialize in retirement plans are now available to answer our many questions. Moving to Steidle has also saved our company over a thousand dollars a year in administration costs. I could not be happier with my decision to use Steidle Pension.

  2. Itzel says

    Hello Mr. Rose, I´m sure you can help me up. I write from Panama City, Central America. My husband lived for about 14 years in U.S. worked for Jevic Transportation NC for about 10 years, the company went into bankruptcy and he came back to Panama desapointed because didn´t get the American dream. He throwed out all documents including driver license , etc. We just noticed that he can claim the money invested in the 401 K Plan. Can he do it from here Panama, how?
    Thanks in advance for your advices,

  3. AR says

    Hi Jeff, I like to see if you can help me.
    I have been working for this US Company for the last 10 years, but my working visa will expire in a few months and I’m planning to go back to my country, and not planning to work in the US anymore.
    I’m 40 and I would like to take my 401K and retirement fund without any penalty. Is this possible?
    Also, what do I have to do in my next year Tax report to let the IRS that I’ll not work with my SSN anymore?

    • says

      @ AR I’m not as familiar for those taking US retirement funds out of state. My hunch is that you’ll have to pay the tax and penalty because there will be no way to transfer the money to an out of country retirement plan.

  4. Bradley says

    Jeff, I plan to retire and leave employment from my current employer. I plan on taking a penalty free distribution from my 401K to last me until I’m 59 1/2, and roll over the rest into an IRA. Once I reach 59 1/2, I will take distributions from my IRA. My question is, if I start working for another employer, will that affect my penalty free distribution in any way from my previous employer?


    • says

      @ Bradley

      I assume you have reached age 55. You can take another job and still get penalty free distributions from the employer you separate from at 55 or later.

      Therefore, you need to determine if the plan you separate from will allow flexible distributions or if they will require you to take a lump sum distribution. Distributions from the plan not directly rolled over will be subject to 20% mandatory withholding.

  5. Tom Mays says

    Hello Jeff,

    I’ve been offered early payment options from a retirement fund from a company that I left 10 years ago. I’m 55 this year and currently working at another job. I don’t plan to retire until after age 65. My question: If I elect to take the lump sum will I have to pay the 10% penalty?

    • says

      @ Tom As long as you are 55, you should be able to avoid the 10% penalty. If you don’t plan to retire until 65 though, it would probably make more sense to roll your 401k into an IRA.

      • Steve Carman says

        I thought the penalty free withdrawals from a 401k after turning 55 were only acceptable if taken from the company 401k where you were working when you retired after turning age 55.?
        Tom stated that he just turned 55 but he left his previous company 10 years ago, that he was considering taking early payment options from.

  6. Deborah Johns says

    I am 60 yrs old not working and I would like to know if I could use my 401 k to pay off my house penalty free. My husband still works part time. Or can I put it into a money market account.

  7. Barb says

    Jeff, I was offered early retirement in August, 2012. I turned 56 in October, 2012. Can I withdraw some of by 401K without incurring the 10% penalty? I am currently working at another place of employment.

  8. toni says

    hello Jeff..i just learned of this option to withdraw money from my 401k..i havent worked at this place since would i go about doing that..& if funds are needed for a emergency how long is the process..Thanks in advance

    • says

      @ Toni You need to contact the administrator on your 401k to see what they need to make the withdrawal. The process depends on them at what paperwork is required. I’ve seen some be done in a week while other have taken over a month.

      • vermona says

        You see who handles your 401k then go on their website resister,then do a withdrawal, in two days you can get a check by UPS for a $ 25.00 charge,that’s taken from your money. I helped a friend to do this.

  9. Mine says

    I separated from service and took out my 401K last year without the 10% penalty. I left money on my qualified pension. Can I cash out some of the money on my qualified pension plan this year without a penalty and roll over the difference into an IRA?

  10. arnel says

    i’m a 40+ yr old second-courser who quit my job and decided to go back to college using my 401k ,without incurring taxes, to pay for my schooling. How is this possible? what are the process i need to go thru to make this happen? pls advise. thanks

    • says

      @ Arnel You would need to contact your IRA custodian to explain the situation and make sure they give you the right paperwork. I would also double check with your tax professional to make sure it gets done correctly.

  11. Danielle says

    Hi Jeff. I am a young woman in my 20’s and I use to work for this company that went out of business. I had a least 2000 thousand dollars in my 401 k. Can I withdraw the money without having to pay a penalty? Is it possible for the money to be taxed at 10% so that I want have to pay the IRS.

    Thanks in advance

  12. Derek says

    Hi Jeff, i was at a company that i never put anything toward my 401K but they put a paycheck worth for every year i was there on my 10 year anniversary with the company. I am no longer at the company, i left on my own (not laid off or fired) and i received the 401K packet in the mail. Stating i have just over $8500 in there, i want to know the worse case after penalties and taxes (im in CA) What i would end up with after cashing out?

  13. JIM ST VIGNE says


    • says

      @Jim Since you’re 55 and it’s still in a 401k plan you should be able to take a distribution without penalty. Be sure to double check with your tax advisor first.

      • Steve says

        Jim and Jeff…may be too late now, but from my understanding you can only take the 401k withdrawals from your previous employer without 10% penalty if you retired from that company after the date you turned 55 and did not roll it over to an IRA.
        It sounds like you retired from the company with the 401k before your 55th birthday to take the new job on Nov. 2013, just over two months before you turned 55. So you would not be able to take those withdrawals without 10% penalty….Unless you still work for that company as well (working both jobs) and now you are retired from the company with 401k after you turned 55 in January of 2014.

  14. jim marhevka says

    My company laid me off, gave me $27,235.00 my 401k money, I have 60 days to roll it over. I will have 0 income this year, I own a house and have me as a deduction and my son as a dependent, if I use this 27k my tax obligation would be 0 to minimal correct? How about 10% penalty is there a way that because my tax burden is so low that I will get that back to? I am 47 years old. Thank you

  15. babs says

    I plan to retire at 55 (currently 52 now), my pension would be a lump sum of $350,000 plus my 401k has about $500,000…I would like to roll over my 401k, and live on my pension until i’m 60. are the taxes higher or is there a penalty for using the pension money for living expenses?

    • says

      @Babs If you’re planning on retiring early (55) you may want to leave your 401k where’s it’s at. How the tax laws work, you can take a distribution at 55 and avoid the 10% penalty. If you roll it into an IRA, you’ll be subject to the 10% early withdrawal penalty unless you exercise 72t.

  16. Daniel L. Phillips says

    Re:: 401k Distributions–

    Very Curious–

    I spoke with a Company rep about making a
    withdraw from my 401K.. The rules they have are I can take a “One” time withdraw at 591/2. Ok That’s October 28th.. How close to that do I need to be to avoid the penalty? Does it have to be 59 and exactly the 28th of the month.. Born April 28th 1955.. Daniel

    • says

      According the IRS 590, it’s your actual age. To be safe, I would wait until November to access the funds. Also, be sure to double check with your tax advisor first.

  17. Sarah says

    I left my employer 7 months ago. I still have not gotten another job. And I need cash. My 401k is about 2500 dollars do you think I will pay a fee ?

  18. Virginia Sanders says

    I was laid off from my company in March 2014. I am now 59 1/2. I have money that I have put in to my retirement plan. I am not working now but need the money. Can I cash out some of the money on my pension now without a penalty and just retire early?

    • says

      @ Virginia When you say “put in to my retirement plan” does that mean your 401k or an IRA? Either way since your 59 1/2 you can access the money without penalty.

  19. mango says

    These are all lame. Best: Become “self-employed”, create a solo 401k account, with yourself as the “employer” (administrator). You can do it through for example. Roll all your funds into that 401k – it can stay in the same accounts … just contact Fidelity, etc and just tell them you have a new administrator and give them the info. Then borrow against the 401k as needed, penalty free. You just make note of it through the administrator website, then call your broker (Fidelity, etc), and tell them you want to cash out X amount. Note you will have to create/modify a payment plan to pay your plan back with interest … but all that interest is back to you so all you’re really doing is paying that interest into your future. No taxes, no penalty, all legal, no worries about what happens if you lose a job. Of course you will have to pay 401k administration fees, generally it’s something like 0.25% per year of your total plan assets but that’s a lot less than taxes and tax penalties which you always risk if you have an employer who will cash you out in the event of a layoff. It’s a ton easier than it sounds … just requires a little effort upfront.

    • says

      @ Sandy Your RMD will be based on the previous end of year value (on December 31st) and a percentage determined by the IRS (I think it’s currently around 3.5% and increases each year). Your 401k provider should be able to assist you with this.

  20. Fred says

    I am using turbo tax and they keep switching me to under 59 and a half when I took my Fidelity account money out after I have insisted I was over 59.5 . I did this during the same calendar year that I turned 59. Not sure why this is so confusing I have proof I took this money out after I turned 59.5 . What is the law I have looked on the IRS website and see no problems .

  21. Becca says

    Hi, I took a loan from 401k last year to cover medical bills at age 49. After I took the loan I found out the company I was working for was being sold and changing ownership. As a result most all employees were told we would be losing our jobs by the next year. In the mean time I was offered a job with abother company that was to good to pass up. End result my loan was now considered an early distrabution because the new company did not accept loans. What can I do now that my loan is considered an early withdrawal with a penalty?
    Do I need to contact the former 401k pension holder or can I go ahead and claim on my tax return a medical hardship?

    Thank you,

  22. Colin Locke says

    I saw an answer above that partly answers my question, but my circumstances are just a tad bit different. I retired @ 57 years & started withdrawals from my 401K. After nine months, I was asked by my previous employer to come back to work as a temporary employee for what was supposed to be a couple of months work. A year later, I’m still working as a temporary employee. I kept my withdrawals from the 401K as I expected to be let go at anytime. So, my question is, are my withdrawals from my 401K subject to the 10% penalty, even though I separated from service, but returned to work as a temporary employee for the same employer after 9 months of retirement? Thanks

  23. Barbara says

    Jeff, Thanks for the solid advice. My husband is 58 and I will be 59 1/2 soon. He has a 401K. Since I’m 59 1/2 can we withdraw without penalty even though he is 58?


    • says

      @Barbara All retirement accounts are tied directly to your own personal social security number and, subsequently, your own DOB. Just because you’re already 59 1/2 doesn’t mean your husband can withdraw from his 401k (unless he’s already retired).

  24. Brett says

    Thanks for all the tips, very informational and helpful for any and everyone! I’m young, 30yrs, and we are trying to gather up as much cash as possible for a down payment on our next home…Unfortunately I have had a bad run of health and have caught a few different bugs from where I work (Hospital), so instead of paying these large medical bills out of pocket and having hardly any cash in hand… its nice to instead pull the 7.5% of my Adjusted Gross Income. Even though it didn’t cover all of my bills from two hospitalizations it covered most of it… I have contributed a LARGE amount of my earnings to my 403b and 401k since our employer does some good matching, but in reality I could really use some of that money now vs later.. Was a great way for us to use OUR OWN MONEY! without the penalty… Great advice here for others and lots of situations!

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