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When Can You Withdraw From Your 401k Or IRA Penalty Free?

If you are forced to withdraw funds from your IRA or 401k early, it’s helpful to know the rules and regulations around early withdrawals.

401ks, IRAs and other pre-tax retirement savings accounts are common ways to save for retirement, and millions of Americans pour money into them every year. Unfortunately, many of those same Americans take early withdrawals from these accounts due to hardship, loss of a job or other unplanned circumstances. According to a survey, 17% of Baby Boomers (the generation most likely to make an early withdrawal) used their 401k plan and other retirement savings to pay for an emergency expense.

401k and IRA Withdrawal Rules for 2020

Due to the CARES Act passed in 2020 as a response to the economic hardships faced by many Americans due to the coronavirus, there are some special rules for 2020 as it pertains to withdrawing from your 401k or IRA. Individuals who would normally incur the IRS’ 10% penalty on early distributions are exempted for ‘coronavirus-related distributions’ of up to $100,000 of distributions in 2020. While the 10% penalty is waived, distributions may still be considered as ordinary income. This ordinary income can be spread over 3 tax years, lowering the tax impact. Individuals also have 3 years from the date of the distribution to repay all or a portion of the distribution taken if they so choose.

While these new rules can help people who may be forced to tap their retirement funds in 2020, we’ll mostly focus this article on the general rules that pertain to early withdrawals in most years.

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The Cost of Early Withdrawals

Early withdrawals from an IRA or 401k account can be an expensive proposition because of the hefty penalties they carry under many circumstances. The IRS allows penalty-free withdrawals from retirement accounts after age 59 1/2 and requires withdrawals after age 72 (these are called Required Minimum Distributions [RMDs] and the age just changed due to the SECURE Act passed in January). There are some exceptions to these rules for 401ks and other ‘Qualified Plans.’ Generally though, if you take a distribution from an IRA or 401k before age 59 ½, you will likely owe both federal income tax (taxed at your marginal tax rate) and a 10% penalty on the amount that you withdraw, in addition to any relevant state income tax. That tends to add up. Given these consequences, withdrawing from a 401k or IRA early is usually not ideal.

Try to think of your retirement savings accounts like a pension. People working towards a pension tend to forget about it until they retire, because there is no way they can access it before retirement. While that money is locked up until later in life, it becomes a hugely powerful resource in retirement. The 401k can be a boon to your retirement plan because it gives you flexibility to change jobs without losing your savings, but that all starts to fall apart if you use it like a bank account in the years preceding retirement. Your best bet is usually to consciously avoid tapping any retirement money until you’ve at least reached the age of 59 ½.

Sometimes, there are circumstances that mean some people may not have the luxury of avoiding tapping into their retirement accounts, 10% penalty or no. But before you pay the penalty, be aware that there a few circumstances where the IRS grants exceptions to the 10% penalty rule. These exceptions may make it possible for you to tap your retirement savings in a time of need without having to pay the IRS the extra penalty for the privilege. They require some planning and care to implement, so it’s best to be aware of them before the need actually arises.

What to Ask Yourself Before Making a Withdrawal From Your 401k or IRA

While there are many very valid reasons that you may need to dip into your retirement savings early, try to avoid feeling like your retirement money is burning a hole in your pocket. While retirement may feel like an intangible future event, hopefully, it will be your reality some day. So before you take any money out, ask yourself – do you actually need the money now? Think of it this way: rather than putting money “away,” you are actually “paying it forward.” If you are relatively early on in your career, your present self may be unattached and flexible. But your future self may be none of those things. Pay it forward. Do not allow lifestyle inflation to put your future self in a bind.

With all this talk of 10% penalties, and not touching the money until you’re retired, we should point out that there is a solution if you feel the need to be able to access your retirement funds before you reach age 59 ½ without penalty — contribute to a Roth IRA, if you qualify for one. Because contributions to Roth accounts are after tax, you are typically able to withdraw from one with fewer consequences. Keep in mind that there are income limits on contributing to Roth IRAs, and that you will still be taxed if you withdraw the funds early or before the account has aged 5 years, but some people find the ease of access comforting.

For some folks, however, a Roth-type account is not easily available or accessible to them.

Reasons For Penalty-Free Retirement Fund Withdrawals

If you find yourself in a situation where you do need to withdraw funds from your 401k or traditional IRA early, there are a few circumstances in which the 10% penalty might be waived. This doesn’t include items that deal with death or complete disablement. In that case, a penalty tax is not likely to be top of your concerns.

Keep in mind that although these exceptions may enable you to avoid the 10% penalty, you will still owe income tax on any premature IRA or 401k distributions. Also remember that these are broad outlines. Anyone wanting to tap retirement funds early should talk to their financial advisor.

Coronavirus-related withdrawals

The coronavirus has presented us all with some unique challenges, and many people are feeling the impact of the volatile market and the uncertain economy. The recently-passed CARES Act (the $2 trillion coronavirus stimulus bill) included several ways to offer some relief to retirement savers. Required Minimum Distributions are suspended for 2020, allowing individuals to defer taking distributions from retirement accounts if desired. For those who’ve already taken Required Minimum Distributions in 2020, they may actually be able to return those funds to their IRA or 401k and push any further distributions into 2021.

As mentioned earlier, there are also relaxed rules around early distributions and flexibility for loans from certain retirement plans so that the 10% early withdrawal penalty may be waived in many cases. Additionally, loan repayments from workplace retirement plans may be delayed for one year (in effect through the end of 2020).

However, this isn’t a free pass to take money from your retirement accounts — as we’ve discussed the distributions may still be taxed as income and you still need to repay yourself for the loan within three years.


You are allowed to take an IRA distribution for qualified higher education expenses, such as tuition, books, fees and supplies. This distribution is still subject to income tax, but there won’t be an additional penalty. For instance, if you want to go back to graduate school and you need the money, you can decide to tap your retirement fund for tuition. The rule also allows you to apply this exception to your spouse, children or their descendants. Keep in mind this is for IRAs, 401ks or other Qualified Plans are subject to a different ruleset.

Specifically, some 401k plans will allow what is called a “hardship withdrawal,” with education expenses sometimes falling under this clause. It is important to note here that expenses eligible for a hardship withdrawal will vary depending on your 401k plan administrator, so make sure you are aware of what will qualify under your specific plan. Some providers do not allow hardship withdrawals at all. You’ll also likely be charged the 10% fee for taking funds from your 401k early for most types of hardship withdrawals. There are a few exceptions, but education expenses are usually not one of them. Basically, hardship withdrawals mean you’re able to take money from your 401k before you reach age 59 ½, but most of the time you will still be hit with the penalty.

First-time home purchase:

You can take up to $10,000 out of your IRA penalty-free for a first-time home purchase. If you are married, your spouse can do the same – and “first-time home” is defined pretty loosely. For the purposes of the IRS, it is your first-time home if you have not had ownership interest in a home for the past two years. Just like the education exclusion, you can also tap this option for the benefit of your family. Your children, parents or other qualified relatives may receive the same $10,000 for their purchases, even if you’ve used this benefit for yourself previously or already own a home.

First-time home purchases or new builds may also be considered eligible for a “hardship withdrawal” from your 401k, but again, the 10% penalty will still likely apply here.

Medical expenses or insurance:

If you incur unreimbursed medical expenses that are greater than 10% of your adjusted gross income in that year, you are able to pay for them out of an IRA without incurring a penalty.

For a 401k withdrawal, if your unreimbursed medical expenses exceed 7.5% of your adjusted gross income for the year then the penalty will likely be waived.

Family Circumstances

If you are required by a court to provide funds to a divorced spouse, children, or dependents, the 10% penalty can be waived.

Series of Substantially Equal Payments:

If none of the above exceptions fit your individual circumstances, you can begin taking distributions from your IRA or 401k without penalty at any age before 59 ½ by taking a 72t early distribution. It is named for the tax code which describes it and allows you to take a series of specified payments every year. The amount of these payments is based on a calculation involving your current age and the size of your retirement account. Visit the IRS’ website for more ore details here.

The catch is that once you start, you have to continue taking the periodic payments for five years, or until you reach age 59 ½, whichever is longer. Also, you will not be allowed to take more or less than the calculated distribution, even if you no longer need the money. So be careful with this one!

What if you only need the money short term?

Although there are other qualifying exceptions to withdraw IRA or 401k assets penalty-free, those listed above are the major ones. But suppose you’re not interested in paying any taxes at all. You can still use your 401k to “borrow money” via a loan — the interest goes to you, the loan isn’t taxable, and it wouldn’t show up on your credit report. Here’s how it works:

401k loan:

The IRS allows you to borrow against your 401k, provided your employer permits it. It’s important to note that not all employer plans allow loans, and they are not required to do so. If your plan does allow loans, your employer will set the terms. The maximum loan amount permitted by the IRS is $50,000 or half of your 401k’s vested account balance, whichever is less. During the loan, you pay principle and interest to yourself at a couple points above the prime rate, which comes out of your paycheck on an after-tax basis. Generally, the maximum term is five years, but if you use the loan as a down-payment on a principal residence, it can be as long as 15 years. Sometimes, employers will require a minimum loan amount of $1,000.

The benefits of such a loan are obvious: you do not need a credit check, nothing appears on your credit report, and interest is paid to you instead of a bank or credit card company. The interest rates are usually lower than what you could receive elsewhere, and the paperwork is not complex.

Now the downsides: If you leave your leave your employer (or are fired), your loan is generally due right away, usually within 60 to 90 days. If you can’t pay it back, you will be assessed a penalty by the IRS. You are also not able to borrow from an old 401k plan — you can only borrow from a 401k if you are still working for the employer where that 401k resides. You are also not able to borrow from an IRA if you transferred your 401k funds to an IRA. Also, taking a 401k loan depletes your retirement principal and will cost you any compounding that your borrowed funds would have received.

IRA Rollover Bridge loan:

There is one final way to “borrow” from your 401k or IRA on a short-term basis, and that is to roll it over into a different IRA. You are allowed to do this once in a 12-month period. When you roll an account over, the money is not due into the new retirement account for 60 days. During that period, you can do whatever you want with the cash. However, if it’s not safely deposited in an IRA when time is up, the IRS will consider it an early distribution and you will be subject to penalties in the full amount. This is a risky move and is not generally recommended, but if you want an interest-free bridge loan and are sure you can pay it back, it’s an option.

Our Take

Even though there are a number of ways you can withdraw from your 401k or IRA penalty-free, we always recommend not touching your retirement savings until you are actually retired. Compounding is a huge help when it comes to maximizing your retirement savings and extending the life of your portfolio, and you lose out on that when you take early distributions. To see how much compounding can affect your 401k account balance, check out our article on the average 401k balance by age.

We understand that it’s always possible for unforeseen circumstances to arise before you reach retirement and being aware of the exceptions that exist can allow you to make informed decisions and possibly avoid paying extra fees and taxes.

Readers, have you ever tapped your retirement funds early for an emergency or one of the reasons above? 

To take control of your finances, a good place to start is by stepping back, getting organized, and looking at your money holistically. Personal Capital’s free financial tools will allow you to calculate your net worth, track all of your accounts in one place, make sophisticated projections for the success of your retirement plan, and more.

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