Withdrawing from a 401(k) before 59 ½

When facing an unexpected cash crunch, most people look to their retirement accounts for help. It can be tempting, but if you’re under the golden age of 59 ½, there are some things you’ll need to consider.

Most early distributions come at a cost – the IRS levies a 10% penalty in addition to the usual income taxes that you’ll owe on the funds.

Under certain circumstances, the penalty can be waived. Let’s take a look at some of the penalty-free ways to access your retirement account.

1) You qualify for a hardship distribution 

This means that you have an “immediate and heavy financial need” and it is “necessary to satisfy that financial need.”[i]

Here are a few examples of what may qualify as a hardship.

  • Expenses for medical care incurred by yourself or dependents
  • Payment to prevent eviction
  • Expenses for certain repairs relating to damage of your principle residence
  • Funeral expenses

Important note: Both IRAs and 401(k)s allow for certain penalty free distributions. From an IRA, in addition to the list above, you could also take penalty free distributions relating to first time home buying and higher education expenses. 401(k) penalty-free distributions are more restrictive.

2) The Rule of 55

If you have been contributing to your employer sponsored retirement plan, and have been fired or quit after the age of 55, but before the age of 59 ½, you may qualify for penalty free withdrawals.[ii]

Bear in mind that this exception only applies to the plan you were contributing to at the age cutoff and time of firing.  Any plans from previous employers are not eligible for this exception – they would still be subject to the 10% penalty.

The Rule of 55 only applies to 401(k)s and 403(b)s, not IRAs.

3) 72(t) Withdrawals

If you need the cash but it doesn’t necessarily qualify as a hardship, and you are too young for the Rule of 55, there may yet be an option for you.

Under 72(t) you take withdrawals based on your life expectancy – the withdrawals must continue for at least 5 years or until you reach 59 1/2, whichever is longer.[iii] Meaning if you took money at 53, you would be signing up for a specified amount each year until you hit 59 ½, which is 6 ½ years in this example.

Though you technically access the money penalty free, you do lose the opportunity for compounding growth over these years for the assets removed from the account. You must also be separated from the plan you are withdrawing from.



[i] IRS: Retirement Topics – Hardship Distributions. Ed. Nov, 2016

[ii] IRS: Topc 558 – Additional Tax on Early Distributions from Retirement Plans Other Than IRAs. Ed. April, 2017

[iii] IRS: Retirement Plans FAQ regarding Substantially Equal Payments. Ed. Jan, 2017

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