a couple discussing retirement and 401k plans

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In general, if you withdraw funds from you 401K prior to reaching 59 ½ years of age, you are subject to a 10 percent early withdrawal penalty, plus by law your plan administrator must withhold 20 percent of your withdrawal for income tax purposes.  As with most government programs, however, there are exceptions which could allow you to withdraw money from your 401K early without suffering a penalty.

Keep in mind that the 10 percent early withdrawal penalty is just that – a penalty. You are required to pay the 10 percent in addition to the normal income tax that you are required to pay upon the withdrawal of funds from a 401K. This is a severe penalty, designed to discourage people from making early withdrawals.

Medical Hardship And Other Exceptions

If your medical bills exceed 7.5 percent of your adjusted gross income (AGI) then you may be able to withdraw some funds from your 401K to pay for medical expenses without suffering an early withdrawal penalty, although 20 percent will still be held back for possible income tax purposes.

If the person whose name is on the account dies before turning 59 ½ then funds may be withdrawn from the account with no early withdrawal penalty.

If the person whose name is on the account is permanently disabled then he or she may be able to withdraw from a 401K with no early withdrawal penalties.

It is also possible to set up what are known as “substantially equal payments” out of your 401K over your lifetime. It is recommended that you consult with a tax or 401K expert before setting up any “substantially equal payments” to yourself out of your 401K in order to minimize the possibility of a mistake being made.

Court Ordered Withdrawal

If you divorce or are involved in certain other types of litigation a judge may order that finds in your 401K be dispersed. Funds dispersed under court order are not subject to the 10 percent early withdrawal penalty, but they are still considered taxable income and may be subject to the 20 percent back-up withholding.


If you retire from the workforce after you reach your 55th birthday you may withdraw funds from your 401K retirement fund without the 10 percent penalty, but you are still subject to the 20 percent back-up withholding for income tax purposes.


If you leave one job and go to another you may withdraw all of your finds from one 401K without penalty and without back-up withholding so long as all of the funds are deposited into another 401K with your new employer within 60 days.


Individuals are only allowed to contribute a certain amount of tax-deferred income to their 401K each year.  However, individuals are allowed to make extra contributions of non-tax-deferred money if they choose.  If you have made contributions that were already subject to income tax, then you may withdraw those funds from your account at any time with no prepayment penalty and no tax is due on those funds (since all tax was already paid at the time the funds were deposited).

Get Professional Advice

401Ks can be complex and their eventual outcome can be vital to your retirement.  Therefore it is highly recommended that anyone setting up a 401K consult with an attorney or tax advisor or licensed investment advisor who is knowledgeable in this field in order to insure that there will be no negative surprises when it comes time for you to retire.

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