How to Withdraw From a 401(k) Without Penalty

Investors in a 401(k) plan must wait until retirement before taking distributions or withdrawals from the account. Taking funds out before 59½ incurs a 10% early withdrawal penalty plus income taxes due on the distribution from the Internal Revenue Service (IRS).

However, life events can happen, and account owners may need to tap into their retirement funds early. There are a few ways to withdraw from a 401(k) early without a penalty.

Normal 401(k) Distributions

Under IRS rules, investors can withdraw funds from their 401(k) account without penalty only after they reach age 59½, become permanently disabled, or are otherwise unable to work. Plan participants must take required minimum distributions (RMDs) from their 401(k) each year when they reach age 73.

Distributions from a traditional 401(k), where the tax was deferred while saving, mean investors pay income tax at their current ordinary tax rate. Those with a Roth 401(k) account have already paid tax on money saved, so withdrawals, including any earnings on the Roth account, are tax-free.

Hardship Withdrawals

Individuals may be eligible to take early distributions from their 401(k) without penalty if they meet certain criteria with a hardship distribution, defined as an immediate and heavy financial burden. Hardship distributions are only allowed up to the amount needed. Withdrawals exceeding that amount are considered early distributions and are subject to the 10% penalty tax.

The plan administrator must approve any hardship distribution, and individuals will still owe income tax on their distribution. Qualifying expenses may include:

• Essential medical expenses for treatment and care
• Home-buying expenses for a principal residence
• Educational tuition and fees
• Expenses to prevent being foreclosed on or evicted
• Burial or funeral expenses
• Certain expenses to repair casualty losses to a principal residence, such as losses from fires, earthquakes, or floods

401(k) Loans

Those who do not meet the criteria for a hardship distribution may be able to borrow from their 401(k) before retirement. The specific terms of these loans vary among plans and administrators. Loans from a 401(k) include interest, which is deposited back into the 401(k) and treated as investment income.

All loans must be repaid within five years unless used to finance the purchase of a primary residence. For those in the armed forces, the loan term is extended by the length of their active service, without penalty. Individuals who lose or resign from their jobs must repay the loan by the due date of their federal income tax return, including extensions.

The IRS provides some basic guidelines for loans that won’t trigger the additional 10% tax on early distributions. For example, a loan from a traditional or Roth 401(k) cannot exceed the lesser of 50% of the vested account balance or $50,000. Although borrowers may take multiple loans at different times, the $50,000 limit applies to the combined total of all outstanding loan balances.

SEPP Program

Substantially Equal Periodic Payment (SEPP) distributes funds from an individual retirement account (IRA) or other qualified retirement plans before 59½ and avoids incurring IRS penalties. IRA owners can take an early distribution without penalty as part of IRS rule 72(t). SEPP withdrawals are not permitted from the qualified retirement plan while still employed with the plan sponsor.

The money can come from an IRA via SEPP at any time. The distributions are formulated as a series of equal periodic payments over an individual’s life expectancy using the IRS tables. Once SEPP payments begin, they must continue for five years or until age 59½, whichever comes later. Those who fail to meet the program’s requirements incur a 10% early tax penalty.

The Rule of 55

If an individual loses their job or retires when they’re age 55 but not yet 59½, they might be able to take distributions from their 401(k) without the 10% early withdrawal penalty. The IRS allows employees separated from their employer to receive a penalty-free distribution from the qualified plan in the same year they turn 55 or older.

However, this only applies to the 401(k) from the employer the employee just left, not any earlier employer plans or individual retirement accounts (IRAs). If they transferred or rolled over IRA funds from a previous employer into a current 401(k) before retiring at age 55, those funds would qualify for penalty-free distributions.

How to Catch Up on Retirement Savings

• Max out 401(k) contributions: Individuals can fully fund this employer-sponsored plan, saving up to the contribution limit each year, which is $23,500 in 2025, plus $7,500 in catch-up contributions for those 50 or older. For employees aged 60, 61, 62, and 63 who participate in these plans, a higher catch-up contribution limit of $11,250 applies.
• Open a traditional or Roth IRA: Those without access to an employer-sponsored account or who want to maximize their savings beyond their 401(k) can save up to $7,000 in a traditional or Roth IRA, plus a catch-up contribution of $1,000 for those 50 or older.
• Health savings accounts: Savers with a high-deductible health plan (HDHP) have another retirement planning option. A health savings account (HSA) allows individuals to set aside pre-tax dollars for qualified medical expenses. Because HSAs have no use-it-or-lose-it provision, they’re also a savings tool for future costs. In 2025, the maximum contribution limits on HSAs are $4,300 for individuals and $8,550 for families. 
• Investigate other investment options: Investors may add to their retirement savings with exchange-traded funds (ETFs), real estate investment trusts (REITs), and annuities. These investments are subject to capital gains taxes.

The Bottom Line

A 401(k) is designed to provide retirement income. In most circumstances, withdrawing money before age 59½ means paying a 10% early withdrawal penalty plus income taxes. However, those who need money for a major expense, such as important medical treatment, a college education, or buying a home, may qualify for a hardship distribution or 401(k) loan.