BUSINESS

It can be done, but do it only as a last resort

Reviewed by Ebony Howard
Fact checked by Kirsten Rohrs Schmitt

If your employer allows it, getting money from a 401(k) plan before age 59½ is possible. However, early withdrawals deplete retirement savings permanently and, minus a few exceptions, carry a 10% penalty and an income tax bill. Your company’s human resources department can help you explore your options.

Key Takeaways

• If you withdraw money from a 401(k) plan before age 59½, you may incur a 10% early withdrawal penalty along with income taxes on the distribution.
• The IRS allows certain exceptions to the penalty, such as for medical bills and natural disasters.
• You may qualify for a hardship withdrawal for certain expenses, but you will still owe the 10% penalty unless it meets one of the exceptions.
• Even if the IRS permits an early distribution, your 401(k) plan may not, so check your plan document for specifics.

Penalties for Early Withdrawals

Withdrawing money from a 401(k) early means you will owe income taxes on the distribution along with a 10% tax penalty on the amount withdrawn unless it qualifies for an exception to the penalty under IRS rules.

Taking an early withdrawal “really should be your last resort,” says Eric Droblyen, CEO of 401(k) provider Employee Fiduciary. “Once you take that money out, it can’t keep earning compound interest.”

Even though the IRS does allow penalty-free withdrawals in certain cases, those distributions come with a large cost in future retirement income. “If you take a $10,000 distribution now, it could have been $20,000 or $30,000 by the time you retire,” Droblyen adds.

$6,300

The approximate amount you will clear on a $10,000 withdrawal from a 401(k) if you are under age 59½ and subject to a 10% penalty and taxes.

Exceptions to Early Withdrawal Penalty

The IRS permits early withdrawals without a penalty for medical bills, natural disasters, and certain other contingencies. In addition, if you leave or lose your job before age 59½, the age threshold drops to 55.

You may also withdraw up to $5,000 without penalty to pay expenses related to the birth or adoption of a child under the terms of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

Here’s the full list of possible exceptions:

Exceptions to Early Withdrawal Penalties
Reason	Notes
Birth or Adoption	Up to $5,000 per child for qualified expenses
Automatic enrollment	Participants can choose to withdraw contributions if they are automatically enrolled in the plan, but must do so by their second pay date (or within 30 days of the first pay date, whichever is sooner)
Corrective Distributions	If you exceed contribution limits, you can withdraw the excess without penalty within time limits
Death or disability	If the account owner dies or becomes totally and permanently disabled
Disaster recovery	Up to $22,000, if you sustain losses because of a federally declared disaster where you live
Domestic Abuse	Up to $10,000 or 50% of the account, whichever is lower.
Domestic relations	When a marriage is dissolved, a court may order distributions to a former spouse or dependent.
Emergency personal use	One distribution per year, up to $1,000 for personal or family medical emergencies.
Equal payments	As part of a substantially equal periodic payments (SEPP) plan
Dividends	If received through an employee stock ownership plan
Levy	If the IRS levies the plan
Medical expenses	The amount of unreimbursed medical expenses, exceeding 7.5% of your AGI
Military	For qualified reservists called to active duty
Rollovers	Within 60 days of distribution
Separation	If the employee leaves their job after age 55
Terminal illness	If certified by a physician as being terminally ill prior to the distribution

Note, however, that even if a distribution is covered by one of these exceptions, it may not be permitted under the terms of your 401(k) plan. Check your plan document to determine what types of withdrawals are allowed.

Hardship Distributions

A retirement plan may also allow early distributions in the event of an “immediate and heavy financial need.” These are called hardship distributions. An employee is automatically considered to qualify for a hardship distribution to pay for the following expenses:

• Medical expenses for the employee or their family (spouse, children, dependents, or beneficiary)
• Purchase of a primary residence (excluding mortgage payments)
• Tuition and related expenses for the employee, their spouse, or their children or dependents
• Payments to prevent foreclosure or eviction
• Funeral expenses for the employee or their family members
• Certain expenses to repair damage to the primary residence

Note, however, that these distributions are limited to the amount needed to cover the financial need, along with any tax they incur. Hardship withdrawals are still subject to the 10% penalty, unless they meet one of the exceptions. In addition, hardship distributions cannot be repaid to the plan or rolled into another tax-advantaged plan.

Important

With an early distribution, you will still owe the income taxes on the distribution even if the penalty is waived. If it’s a traditional 401(k), you will owe taxes on the entire withdrawal. For a Roth 401(k), you’ll only pay taxes on the earnings.

Withdrawal Alternatives

Loan: You can take a 401(k) loan to make an early withdrawal. Essentially, you’re loaning money to yourself, with a commitment to pay it back. A loan allows you to replace the money, which you can do through payments deducted from your paycheck. Check with your employer to see if you’re eligible.

SEPP withdrawals: Substantially equal periodic payments (SEPPs) are an option for withdrawing funds from an IRA without paying the early distribution penalty of a 401(k). Withdrawals are not allowed while working for your employer. If the funds are from an Individual Retirement Account (IRA), you may start SEPP withdrawals at any time.SEPP must be calculated using one of three methods approved by the IRS: fixed amortization, fixed annuitization, or required minimum distribution (RMD).

Do I Have To Pay Back a 401(k) Loan?

Any money not repaid on a 401 (k) loan, plus interest will be considered a plan distribution. Some plans may even require you to repay the entire loan if you leave your job.

How Much Tax Do I Pay on an Early 401(k) Withdrawal?

With a traditional withdrawal, the money will be taxed as regular income, just as it would in retirement. That’s from 10% to 37%, depending on your taxable income. The taxes will be due for the tax year you take the distribution. If your withdrawal does not meet the qualifications for a penalty-free distribution, you will also pay an additional 10% tax.

What Are the Pros and Cons of a Withdrawal vs. a 401(k) Loan?

A withdrawal is a permanent hit to your retirement savings. By pulling out money early, you’ll miss long-term growth. Though you won’t have to pay the money back, you will have to pay the income taxes due, plus a 10% penalty if the money does not meet the IRS rules for a hardship or an exception. A loan against your 401(k) has to be paid back. If the money is repaid on time, you won’t lose much of that long-term growth.

The Bottom Line

To withdraw from your 401(k), speak to your human resources department first to explore your options. Withdrawing money early from your 401(k) can carry serious financial penalties, tax implications, and missed long-term growth.

Imagine always making financial decisions that are actually in your best interests, instead of justifying any impulse. Imagine accepting your financial situation—the good and bad—without blaming yourself or giving up responsibility and control.

If you could live like that, you’d probably be happier and better off financially. That’s the premise of financial mindfulness, which combines traditional mindfulness practices with financial decision-making to help people develop a more balanced, intentional relationship with money.

Researchers have found that people with financial mindfulness experience positive financial outcomes, such as higher credit scores and more rational investment decisions.

Key Takeaways

• Financial decisions are often wrapped up in emotions—like stress, anxiety, frustration, and guilt—which can make it difficult to act rationally.
• Financial mindfulness applies traditional mindfulness practices—awareness and acceptance—to financial decision-making.
• Research has found that higher levels of financial mindfulness are associated with positive financial outcomes, such as higher credit scores.

What Is Financial Mindfulness?

A 2023 study defined financial mindfulness as “the tendency to be highly aware of one’s current objective financial state while possessing an acceptance of that state.”

Practicing financial mindfulness means having a clear understanding of your current financial situation and acknowledging that situation without judgment. This involves observing spending patterns, emotional triggers around money, and financial habits with curiosity rather than criticism.

Unlike traditional budgeting, which might focus solely on numbers, financial mindfulness encompasses the psychological and emotional aspects of our relationship with money, helping us understand the deeper motivations behind our financial choices.

In the 2023 study, Simon Blanchard, a professor at Georgetown University’s McDonough School of Business, and Emily Garbinsky, a professor at Cornell University’s SC Johnson College of Business, collected data from 2,000 consumers to understand the concept of financial mindfulness and its impact on financial outcomes.

According to their research, some of the key benefits of practicing financial mindfulness include:

• Higher credit scores as a result of better financial acceptance
• Less financial avoidance, like ignoring credit card statements
• Better ability to handle market volatility without overreacting
• More rational investment decisions, avoiding traps like the sunk cost fallacy
• Improved emotional relationship with money

Overall, the study emphasizes that financial mindfulness is about how someone interacts with their finances, regardless of how much money they have.

How to Practice Financial Mindfulness

To practice financial mindfulness, you first need to develop regular practices that foster awareness of your financial situation. This might mean weekly or monthly money check-ins, where you spend a few minutes reviewing your income, spending, assets, and liabilities.

The second component of financial mindfulness is acceptance: acknowledging your financial state without judgment. 

Taking mindful pauses before purchases allows you to evaluate whether they align with your values and long-term goals. These pauses can also help you make better-informed decisions without being swayed by emotions, positive or negative.

Additionally, practicing gratitude for current financial circumstances—while still maintaining clear awareness of areas for improvement—can help balance any extreme emotions surrounding money matters. Regular meditation or reflection on financial goals and behaviors can also help identify patterns and triggers that may be hindering your financial progress.

Blanchard offered some additional pieces of advice for anyone interested in incorporating financial mindfulness into their lives:

If you find yourself encountering strong emotions around financial decisions, consider pairing the routine of weekly or monthly financial check-ins with something enjoyable. For example, do it while treating yourself to a pastry at your favorite bakery, so there’s a positive incentive to sit down and look over your accounts.

“Notice whether you feel anxious, guilty, or pressured. Recognizing these emotions—rather than ignoring or being overwhelmed by them—can help you make decisions more calmly,” Blanchard told Investopedia. “Over time, adding small moments of emotional awareness to everyday choices fosters a healthier relationship with money and strengthens your overall financial mindfulness.”

The Bottom Line

Maintaining awareness and acceptance of your financial situation without judgment can lead to better financial outcomes and help you make sound financial decisions. Developing a more conscious relationship with money can help create sustainable financial habits that support both our economic goals and mental well-being.