How to withdraw from my 401(k)?

Summary 

When can I start withdrawing from my 401(k)? 

Having access to a 401(k) is one of the most popular and effective ways to save for retirement in the US.

But before you make any withdrawals from your account, you need to be aware of the rules and regulations surrounding 401(k) withdrawals.   

Generally speaking, withdrawing from a 401(k) is allowed from the age of 59 and a half years old. In some cases, this age may be reduced to 55.  

Any withdrawals that are made prior to these age limitations will be met with a penalty tax. This penalty is typically 10% of the amount that you withdraw.  

How can I start withdrawing from my 401(k)? 

The process of withdrawing from a 401(k) is relatively straightforward.  

To make a withdrawal request, simply contact your retirement plan administrator (or log in to your profile online).  

Either way, you’ll need to supply or verify your bank account details where the money will be paid out, and you may have to verify your identity, too.  

The withdrawal won’t be instant; it can take between two and four days, but some companies may take a bit longer. 

If you have a Roth account, you shouldn’t need to pay income tax for the withdrawal. However, if you have a traditional 401(k) account, you will owe income tax.  

What do I need to do before making 401(k) withdrawals? 

Before withdrawing from your 401(k), it’s wise to consider how much and how often you want to withdraw.  

Your expenses and spending habits will change in retirement, so it’s important to plan and know how much money you’ll need each month to maintain the lifestyle you’ve become accustomed to.  

The best thing to do is create a budget. Take your current incomings and outgoings into account and note how these might change. For example, work-related expenses go down, but health-related expenses go up.  

By creating this budget, you will know how much you’ll need each month and be able to withdraw accordingly.  

With the help and guidance of a professional financial advisor or retirement planner, you can create a comprehensive retirement plan and budget.  

Unbiased can connect you with a financial advisor perfectly suited to your unique situation. Simply tell us more about what you’re looking for, and we’ll find an advisor for you. Get started here.  

How to withdraw from my 401(k) before retirement? 

While you can withdraw from your 401(k) before retirement, most advise against doing so.  

Not only are there upfront penalty fees to consider, but subtracting from your retirement fund early can have negative financial repercussions.  

However, if it becomes necessary for you to make this kind of withdrawal, there are three ways to do so:  

Withdrawing from a 401(k) is not advisable if you are under the age of 59.5.  

However, financial emergencies happen where you may need to lean on your retirement savings.

In such cases, there are a few things you can do to make the process less financially risky.  

The most important thing to do is find out how much penalty tax you will be paying, if any, and whether you can comfortably afford to forgo that amount.  

Alongside determining your tax penalty, you need to reassess your budget and retirement plan and make sure that despite the withdrawal, you are well set up for life outside of the workforce.   

Remember, there aren’t just penalty fees to consider – the amount you withdraw will reduce the overall value of your 401(k) and, therefore, lessen its future returns.  

If you need the funds but don’t want to make an early withdrawal, there is another way to access what’s in there – a 401(k) loan.  

This method allows you to forgo the penalty and income taxes that typically come alongside an early withdrawal.  

With a 401(k) loan, you borrow money rather than withdraw it from your retirement fund and pay it back with interest over time.  

The interest rate changes depending on where you work, but it tends to be higher than prime rates.  

If you can prove to the IRS that your reason for withdrawing from a 401(k) is due to “an immediate and heavy financial need,” you may qualify for a hardship withdrawal.  

Situations that typically qualify for this kind of withdrawal include disabilities, disasters, tuition fees, and funeral expenses.  

What are the fees for early withdrawal of 401(k)? 

The penalty fee for early withdrawal from a 401(k) is 10% of the total amount withdrawn from the account.  

The IRS generally also charges a 20% tax withholding.  

So, if you were to withdraw $50,000, your penalty fee would be $5,000, and your tax withholding would be $10,000. 

However, if you have a disability, are using the funds to finance a proven hardship, or are leaving a job, you may qualify for an exemption from the fees for early withdrawal of 401k.  

Get expert financial advice 

Whether you’re making your first 401(k) withdrawal, want to better manage your money in retirement, or are wondering how much to save, a financial advisor can help.  

Get matched with a financial advisor at Unbiased to find out more about retirement planning and how to manage your funds in the most responsible and cost-effective way possible.  

Find a financial advisor today.