401(k) Withdrawal Rules – Frequently Asked Questions

If you participate in a 401(k) plan, you should understand the rules around separation of service, and the rules for withdrawing money from your account – otherwise known as taking a withdrawal. 401(k) plans have restrictive withdrawal rules that are tied to your age and employment status.  If you don’t understand your plan’s rules, or misinterpret them, you can pay unnecessary taxes or miss withdrawal opportunities.

We get a lot of questions about withdrawals from 401(k) participants. Below is a FAQ with answers to the most common questions we receive. If you are a 401(k) participant, you can use our FAQ to understand when you can take a withdrawal from your account and how to avoid penalties.

When am I Eligible for a 401(k) Withdrawal?

In general, you can’t take a withdrawal from your 401(k) account until one of the following events occurs:

Can I Take a Withdrawal Before I Terminate Employment?

In general, you can’t take a withdrawal from your 401(k) account until one of the following events occurs:

However, a 401(k) plan can also permit withdrawals while you are still employed. These “in-service” withdrawals are subject to the following conditions:

  • 401(k) deferrals (including Roth), safe harbor contributions, QNECs and QMACs can’t be distributed until age 59.5
    • Non-safe harbor employer match and profit sharing contributions can be distributed at any age.
  • Employee rollover and voluntary contributions can be distributed at any time.
  • 401(k) deferrals (but not their earnings), non-safe harbor contributions, rollovers and voluntary contributions can be withdrawn in a “hardship distribution” at any time.

To find the in-service withdrawal rules applicable to our 401(k) plan, check your plan’s Summary Plan Description (SPD).

Can I Leave My Money in my 401(k) Plan After I Terminate Employment?

It depends upon your account balance and the terms of your 401(k) plan. The IRS allows 401(k) plans to automatically “cash-out” small account balances – defined as less than $5,000 – without the owner’s consent upon their termination of employment. Under these rules, account balances between $1,000 and $5,000 must be rolled over into a personal IRA for the benefit of the employee. Amounts below $1,000 can be paid out by check.

To find the cash-out limit applicable to your 401(k) plan, check your plan’s Summary Plan Description (SPD). If your account exceeds this limit, you can postpone withdrawals until the date you must start taking Required Minimum Distributions.

How are 401(k) Withdrawals Taxed?

If a rollover-eligible withdrawal is made to you in cash, the taxable amount will be reduced by 20% Federal income tax withholding. Non-rollover eligible withdrawals (e.g., hardships, RMDs) are subject to 10% withholding unless you elect a lower amount. State tax withholding may also apply depending upon your state of residence.

However, your ultimate tax liability on a 401(k) withdrawal will be based on your Federal income and state tax rates. That means you will receive a tax refund if your actual tax rate is lower than the withholding rate or owe more taxes if it’s higher.

If a 401(k) withdrawal is made to you before you reach age 59½, the taxable amount will be subject to a 10% premature withdrawal penalty unless an exception applies. This penalty is meant to discourage you from withdrawing your 401(k) savings before you need it for retirement. You can avoid the 10% penalty under the following circumstances:

  • You terminate service with your employer during or after the calendar year in which you reach age 55
  • You are the beneficiary of the death distribution
  • You have a qualifying disability
  • You are the beneficiary of a Qualified Domestic Relations Order (QDRO)
  • Your distribution is due to a plan testing failure

A full list of the exceptions to the 10% premature distribution penalty can be found on the IRS website.

How are Withdrawals of Roth 401(k) Deferrals Taxed?

Because Roth 401(k) deferrals are contributed to your account on an after-tax basis, they are never taxable upon withdrawal. Their earnings can also be withdrawn tax-free when they’re part of a “qualified withdrawal.” A qualified withdrawal is one that occurs 1) at least five years after the year you made your first Roth deferral and 2) after the date you:

  • Attain age 59½
  • Become disabled
  • Die

If you withdraw Roth 401(k) deferrals as part of a non-qualified withdrawal, their earnings are taxable at applicable Federal and state rates and may be subject to the 10% premature withdrawal penalty.

Additional answers to Roth questions can be found in our Roth FAQ.

Know Your Options!

401(k) withdrawal rules are complex and restrictive. They are designed to disincentivize you from withdrawing your retirement savings prematurely. Before you take a withdrawal from your 401(k) account, you should discuss your options with your CPA. They can help you plan a withdrawal and minimize your taxes.