Guide to 401(k) and Roth IRA withdrawal rules in retirement

Taking money from retirement accounts before you turn 59½ could hit you with a 10% penalty plus income taxes. Yes, touching your hard-earned retirement savings too early can come with steep consequences.

The rules about taking money from retirement accounts can catch you off guard. Most accounts set the official retirement age at 59½ for withdrawals, but you must start taking money from traditional IRAs and some 401(k)s once you reach 73. It also helps to know that Roth IRA and 401(k) withdrawal rules have big differences that could affect your retirement plans.

Some exceptions can help. The Rule of 55 lets you take 401(k) withdrawals without penalties if you leave your job in or after the year you turn 55. Public safety workers get an even better deal - they can start at age 50.

These rules play a vital role in getting the most from your retirement savings. Understanding when and how you can access money from your retirement accounts without penalties is crucial for maximizing your funds. One wrong move with withdrawals can drain thousands through penalties and taxes. This article walks you through what you need to know about 401(k) and Roth IRA withdrawal rules to help you get your retirement money the right way.

Understanding withdrawal ages and rules

The retirement system sets specific ages that control when you can withdraw from your accounts. You need to know these rules to avoid penalties and get the most from your retirement income.

At what age is 401(k) withdrawal tax-free?

Your 401(k) withdrawals are never completely tax-free. You can make penalty-free withdrawals from your 401(k) when you turn 59½. All the same, you must pay ordinary income taxes on withdrawals from traditional 401(k) plans, whatever your age. This happens because these accounts were funded with pre-tax dollars.

After reaching 59½, you can take money from your 401(k) without the 10% early withdrawal penalty. The withdrawals face federal income taxes at your current income tax rate, which changes based on your overall income and tax bracket at that time.

Standard withdrawal age for Roth IRA and traditional IRA

Both traditional and Roth IRAs let you make penalty-free withdrawals at 59½. The tax treatment is different between these account types.

Roth IRA withdrawals become completely tax-free after age 59½ if your account has been open for at least five years. The five-year period begins with your first contribution and is required for a qualified distribution of investment earnings. This covers both Roth IRA contributions and investment earnings. In stark comparison to this, traditional IRA withdrawals always count as ordinary income for tax purposes.

Roth IRAs give you a big advantage - you can take out your contributions (but not earnings) anytime without taxes or penalties, whatever your age. Taxes and penalties only apply to the earnings portion of a withdrawal if it is not a qualified distribution. Traditional IRAs don’t offer this flexibility.

Roth IRAs don’t require Required Minimum Distributions (RMDs) while the account owner lives. Traditional IRA owners must start taking RMDs at age 73.

How to withdraw from 401(k) after retirement

Here’s how you can withdraw from your 401(k) after retirement:

1. Contact your plan administrator - They will give you the forms you need and explain your plan’s distribution choices.
2. Choose your distribution method - Your options usually include:

• Lump-sum withdrawal
• Periodic payments
• Roll over to an IRA

3. Complete required paperwork - You’ll need to tell them how much to withdraw and how you want to receive it.
4. Set up tax withholding - Most 401(k) plans hold back 20% for taxes, but you should check with your plan provider.
5. Track your RMDs - You must take Required Minimum Distributions starting at age 73. Calculating RMDs accurately is crucial to avoid penalties and to optimize your retirement income. Missing RMDs can cost you a penalty of 25% of the amount you should have taken.

You can only get distributions from a workplace retirement plan when you turn 59½, die or become disabled, the plan ends, or you face financial hardship.

Note that you can always take more than the minimum required amount from your 401(k) plan. Your withdrawal strategy should balance your current income needs with long-term tax planning.

Penalty-free withdrawal exceptions

You might need your retirement money before you actually retire. The good news is that the IRS lets you take out your retirement funds before age 59½ without paying the 10% early withdrawal penalty in several situations. For example, a qualified birth or adoption is one such exception that allows for penalty-free withdrawals.

Hardship withdrawals and qualifying events

A hardship withdrawal happens when you take money from your retirement plan because of what the IRS calls an "immediate and heavy financial need," Your plan's terms might let you access these funds without the 10% penalty, but you'll still need to pay income taxes.

The IRS has approved seven specific situations that qualify as hardship withdrawals:

1. Medical expenses for you, your spouse, or your dependents
2. Costs related to purchasing your principal residence (excluding mortgage payments)
3. Payments to prevent eviction or foreclosure
4. Expenses to repair damage to your principal residence
5. Tuition or educational costs for the next 12 months
6. Funeral expenses
7. Expenses related to a FEMA-declared disaster

Your employer looks at your plan's terms and specific situation to decide what counts as an immediate and heavy financial need. You can only take out what you need to cover your financial emergency, plus enough to pay the income taxes on the withdrawal.

The Rule of 55 explained

The Rule of 55 gives you another way to get penalty-free withdrawals. This rule lets you take money from your current employer's 401(k) or 403(b) plan without penalty if you leave your job during or after the year you turn 55.

This special rule works only with your most recent employer's retirement plan—not IRAs or old employer plans. Public safety workers get an even better deal and can start taking money out at age 50 instead of 55.

Here's what you need to know:

• Many plans don't let you take out partial amounts after leaving your job
• The Rule of 55 helps avoid penalties with Roth 401(k)s, but you might still pay taxes on earnings if the account isn't five years old
• Your money must stay in your employer's plan—moving it to an IRA makes this exception disappear

Substantially Equal Periodic Payments (SEPPs)

SEPPs offer another way to get your retirement money early without penalties. This method lets you take regular payments based on your life expectancy before reaching 59½.

You'll need to:

• Pick one of three IRS-approved calculation methods: required minimum distribution, fixed amortization, or fixed annuitization
• Keep taking payments for five years or until age 59½, whichever takes longer
• Stick to your payment schedule (unless you die or become disabled)

The rules say you can't add money to the account or take extra withdrawals beyond your scheduled payments once you start. Breaking these rules before your required period ends means you'll owe back penalties plus interest on everything you've taken out.

Emergency and medical expense exceptions

New laws have added more ways to take penalty-free withdrawals. Starting in 2024, you can take up to $1,000 yearly for emergency personal expenses when you face “unforeseeable or immediate financial needs relating to personal or family emergency expenses," according to the IRS. You won’t pay penalties but must pay back the money within three years.

Medical expenses that exceed 7.5% of your adjusted gross income also qualify for penalty-free withdrawals. The IRS also allows penalty-free withdrawals for:

• Domestic abuse victims (up to $10,000 or 50% of the account balance)
• Birth or adoption expenses (up to $5,000 per child)
• Health insurance premiums while unemployed
• Terminal illness

An IRS levy on your retirement account is also an exception that allows penalty-free withdrawals.

These exceptions help you avoid the 10% penalty, but you’ll still pay regular income taxes on money taken from traditional retirement accounts.

Roth IRA vs. traditional 401(k) withdrawal rules

Roth IRAs and traditional 401(k)s are two sides of the retirement savings coin. Your retirement income strategy and tax situation depend on how well you understand their different withdrawal rules. It's important to ensure your withdrawal approach is aligned with your overall retirement strategy.

Can you withdraw from Roth IRA without penalty?

Roth IRAs stand out because of their flexibility. You can withdraw your contributions (not earnings) from a Roth IRA anytime you want. You are allowed to withdraw contributions at any time without taxes or penalties, making it easy to access your funds if needed. These withdrawals are tax-free and penalty-free. This feature gives you a financial safety net without hurting your retirement plans.

You need to meet two conditions to withdraw earnings without penalties. Your Roth IRA must be at least five years old, and you must be 59½ years or older. Meeting both conditions means you can make qualified withdrawals, allowing you to withdraw everything—including earnings—as tax-free withdrawals.

Roth IRAs give you another great advantage: you don’t need Required Minimum Distributions (RMDs) during your lifetime. Your money keeps growing tax-free indefinitely and you can pass this tax-advantaged account to your heirs.

Early Roth IRA withdrawal rules

Specific rules apply to early withdrawals from Roth IRAs. Taking out Roth IRA earnings before age 59½ or before the five-year holding period—which begins with your first contribution—usually means paying a 10% additional tax plus ordinary income tax on those earnings. If you withdraw investment earnings early, these Roth IRA earnings may be subject to taxes and penalties unless you qualify for an exception.

You can avoid the 10% penalty (but not always income taxes) on early Roth IRA earnings withdrawals in these situations:

• Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
• First-time home purchase (up to $10,000 lifetime limit)
• Higher education expenses
• Birth or adoption expenses (up to $5,000 per child)
• Disability or death
• Health insurance premiums while unemployed

The five-year holding period for Roth IRAs starts January 1 of the tax year when you make your first contribution. Each Roth IRA conversion or Roth conversion from a traditional account to a Roth IRA has its own separate five-year waiting period. Roth conversions from traditional accounts to Roth IRAs are subject to specific withdrawal rules, and the timing of each Roth IRA conversion affects when you can withdraw investment earnings tax-free.

Tax treatment of Roth vs. traditional withdrawals

These account types differ mainly in how taxes work. Traditional 401(k) withdrawals face ordinary income tax, whatever your age. You pay taxes on both your contributions and years of investment growth.

Qualified Roth IRA distributions come completely tax-free. Both contributions and earnings stay tax-free if you meet the requirements. However, state taxes may also apply to withdrawals, depending on your state of residence.

Roth IRAs excel as estate planning tools. Non-spouse beneficiaries must empty inherited Roth IRAs within 10 years, but these withdrawals stay tax-free. Spouses get more options—they can take distributions based on their life expectancy or empty the account within 10 years.

Traditional 401(k)s require minimum distributions starting at age 73, but Roth IRAs don’t. This vital difference lets your Roth investments grow throughout your life, potentially leaving a bigger tax-free legacy for your heirs.

Required Minimum Distributions (RMDs)

The federal tax law doesn't allow retirement savings to grow tax-deferred forever. Your Required Minimum Distributions (RMDs) will force you to withdraw a portion of your retirement savings each year at a certain age.

RMDs begin for 401(k) and traditional IRA

Traditional IRAs, SEP IRAs, and SIMPLE IRAs require you to start taking RMDs by April 1 of the year following the year you turn 73. The SECURE 2.0 Act changed this age from 72, and it will reach 75 by 2033.

Your first RMD from 401(k) and other employer-sponsored retirement plans must be taken by April 1 of the year following either:

• The year you turn 73, or
• The year you retire (if your plan allows this delay)

The business owners with 5% or greater ownership must start RMDs at 73, whatever their employment status.

The April 1 delay option means you'll need two distributions that year—your first RMD by April 1 and your second by December 31.

How RMDs are calculated

The RMD calculation follows a simple formula:

RMD = Account balance (as of December 31 of the previous year) ÷ distribution period

IRS Publication 590-B provides life expectancy tables that determine your distribution period. Your situation determines which table applies:

• Uniform Lifetime Table: Most people use this
• Joint Life and Last Survivor Table: This applies if your spouse is your sole beneficiary and is more than 10 years younger than you

Your RMD needs recalculation each year as your account balance and life expectancy factor change. Multiple IRA owners can calculate each account's RMD separately but withdraw the total from any single IRA. However, 401(k) RMDs need separate withdrawals from each plan.

Missing your RMD results in a 25% penalty on the unwithdrawn amount, which can drop to 10% if fixed within two years.

RMD rules for inherited IRAs

The original owner's death date and your relationship determine the inherited IRA rules.

Deaths after 2019 require most non-spouse beneficiaries to empty the account within 10 years after the death year. The annual RMDs must continue during this 10-year period if the original owner had started taking them.

"Eligible designated beneficiaries" can use more favorable distribution rules. These include spouses, minor children, disabled individuals, chronically ill individuals, or beneficiaries not more than 10 years younger than the deceased.

Roth IRA owners don't face RMDs during their lifetime. However, Roth IRA beneficiaries must follow RMD rules.

Owner’s death and IRA implications

When the owner of an individual retirement account (IRA) or 401(k) passes away, the assets in the retirement account don’t simply disappear—they transfer to the beneficiaries named on the account. The rules for what happens next depend on the type of account, such as a Roth IRA or a traditional IRA, and the relationship between the account owner and the beneficiary. Understanding these implications is essential for both account owners and their heirs, as the choices made can have significant tax and financial consequences.

What happens to your IRA or 401(k) when you pass away?

When an account owner dies, their IRA or 401(k) becomes an inherited IRA for the beneficiary. For Roth IRAs, if the account has been open for at least five years and the owner was 59½ or older at the time of death, beneficiaries can generally withdraw funds tax-free. This makes Roth IRAs a powerful tool for passing on wealth without saddling heirs with extra taxes. In contrast, withdrawals from inherited traditional IRAs are taxed as ordinary income, so beneficiaries will need to plan for the impact on their taxable income. No matter which type of account you inherit, it’s wise to consult a financial advisor or tax professional to understand your options and avoid costly mistakes. The rules for inherited IRAs can be complex, and the right strategy can help maximize the value of your inheritance.

Spousal vs. non-spousal beneficiary rules

The rules for inherited IRAs differ significantly depending on whether the beneficiary is a spouse or someone else. Spousal beneficiaries have the most flexibility—they can roll over the inherited IRA into their own IRA, allowing them to delay required minimum distributions (RMDs) until they reach the RMD age (currently 73), and even make new contributions if eligible. This option can help a surviving spouse continue growing the retirement account tax-deferred or tax-free, depending on the type of IRA. Non-spousal beneficiaries, however, cannot treat the inherited IRA as their own. Instead, they must follow specific withdrawal rules, such as taking the entire balance within 10 years or, in some cases, spreading withdrawals over their life expectancy. Understanding these required minimum distribution rules is crucial for minimizing taxes and making the most of an inherited IRA.

Beneficiary designations and options

Naming the right beneficiaries for your IRA is a key part of retirement planning. Your beneficiary designations determine who will receive your retirement account assets when you pass away, and how those assets are distributed. Keeping these designations up to date is especially important after major life events like marriage, divorce, or the birth of a child, as outdated information can lead to unintended consequences.

How to choose and update beneficiaries

When choosing beneficiaries for your IRA, consider who you want to inherit your assets and in what proportions. You can name a sole beneficiary or divide your account among multiple people by specifying percentages for each. It’s also a good idea to name contingent beneficiaries, who will inherit the account if your primary beneficiary is unable to do so. To update your beneficiaries, simply complete a beneficiary designation form from your IRA custodian and return it as instructed. Regularly reviewing your designations with a financial professional ensures your retirement assets are distributed according to your current wishes and can help you take advantage of tax-efficient strategies. Keeping your beneficiary information current is one of the simplest ways to protect your legacy and provide for your loved ones.

Post-retirement withdrawal strategies

Building your retirement savings takes decades. The quickest way to access these funds is a vital part of retirement planning. Smart withdrawals can make your savings last longer and lower your tax burden throughout retirement.

However, it's important to remember that investing involves risk, and all withdrawal strategies should consider the potential for loss as well as growth.

Can I take money out of my retirement plan all at once?

Yes, it is possible to withdraw your entire retirement account balance through a lump-sum distribution. All the same, this choice comes with major tax consequences. The IRS will tax your distribution as ordinary income, which could push you into a higher tax bracket. A 20% tax withholding applies to most taxable distributions paid straight to you.

People born before Jan. 2, 1936, might qualify for special tax treatment options. These include capital gains treatment for parts of their distribution.

Rolling over 401(k) to an IRA

Moving your 401(k) to an IRA gives you more investment choices and could mean lower fees. Here's what you need to do:

1. Pick the right account type based on your contribution history
   • Pre-tax 401(k) contributions → traditional IRA
   • Post-tax Roth 401(k) contributions → Roth IRA

2. Ask for a direct rollover where money moves straight between institutions to avoid the 20% withholding
3. Make sure to complete the rollover within 60 days if you get the distribution personally

Remember that moving pre-tax money into a Roth IRA triggers taxes.

Withdrawing from retirement account while minimizing taxes

The usual withdrawal order (taxable accounts first, then tax-deferred, finally tax-exempt) isn’t always the best choice. You might want to think over a proportional withdrawal strategy that takes money from accounts of all types at once, based on their share of your total savings.

This method can keep your tax bill more predictable and could cut your lifetime taxes by over 40%. Retirees with different types of accounts might see their portfolio last almost a year longer.

Taking partial withdrawals from traditional accounts before RMD age can also reduce future required distributions. This helps spread your tax burden more evenly over time.

For personalized guidance on withdrawal strategies and to understand the tax implications for your situation, consult a qualified tax advisor. This article does not provide tax advice or legal or tax advice; please seek professional help for your specific needs.

Conclusion

You need to know the rules about withdrawing money from retirement accounts to make the most of your savings. This piece explores key differences between 401(k) and Roth IRA accounts. Each type has its own rules that affect your retirement income.

Knowing the right time and way to access your funds can help you avoid pricey penalties. The standard withdrawal age is 59½ for most retirement accounts, but some exceptions give you flexibility during tough times or major life changes. You can access your money without penalties through the Rule of 55, SEPPs, and certain medical or emergency provisions.

Roth IRAs give you more flexibility than traditional accounts. You can take out your contributions anytime without penalties, though rules for earnings are stricter. These accounts also let you skip RMD requirements during your lifetime. This means your money can grow tax-free for as long as you want.

Traditional accounts need careful planning because RMDs start at age 73. Missing these required withdrawals will cost you big in penalties and eat into your retirement savings. Mark these age milestones on your calendar to avoid mistakes.

Smart withdrawals from different types of accounts can lower your tax burden in retirement. Taking money proportionally from various accounts works better than emptying them one by one. This approach helps your portfolio last longer.

Plan for these withdrawal rules before you retire. Good planning around taxes, penalties, and distribution requirements can help you control your retirement income and keep the wealth you've built.

Frequently asked questions

At what age can I start withdrawing from my 401(k) and Roth IRA without penalties?

You can generally start withdrawing from your 401(k) and Roth IRA without penalties at age 59½. However, there are some exceptions that allow for penalty-free withdrawals earlier, such as certain hardship situations or using the Rule of 55 for 401(k)s.

Are Roth IRA withdrawals taxed differently than traditional 401(k) withdrawals in retirement?

Yes, they are taxed differently. Qualified Roth IRA withdrawals, including earnings, are completely tax-free in retirement if you've held the account for at least five years and are over 59½. Traditional 401(k) withdrawals, on the other hand, are always taxed as ordinary income.

What is the best strategy for withdrawing from multiple retirement accounts?

Instead of depleting accounts sequentially, consider a proportional withdrawal strategy. This involves taking distributions from various account types simultaneously based on their percentage of your overall savings. This approach can provide a more stable tax bill and potentially extend your portfolio's longevity.

When do I need to start taking Required Minimum Distributions (RMDs) from my retirement accounts?

For traditional IRAs and 401(k)s, you must start taking RMDs by April 1 of the year following the year you turn 73. This age will increase to 75 by 2033. Roth IRAs, however, do not require RMDs during the owner's lifetime.

Can I withdraw all my retirement savings at once?

While you can technically withdraw your entire retirement account balance at once, it's generally not advisable due to significant tax implications. A lump-sum distribution from a traditional 401(k) or IRA will be taxed as ordinary income, potentially pushing you into a higher tax bracket and reducing the overall value of your retirement savings.