Prosperity Financial Group Logo

Over Age 59 ½? Read these 401(k) Withdrawal Rules

Share This Post

Please note: The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2020, includes several provisions aimed to provide financial relief to U.S. households.

The CARES Act:

  • Waives the 10 percent early withdrawal penalty for qualified retirement account holders who have a valid COVID-19-related financial hardship
  • Suspends Required Minimum Distributions (RMDs) from qualified retirement accounts (including traditional IRAs, 401(k) and 403(b) plans, and inherited IRAs) in 2020.

A Traditional 401(k) is a retirement plan offered by employers. The 401(k) is the most popular type of employer-sponsored retirement plan because it offers stellar tax advantages and easy payroll deductions.

If you have a 401(k), you’ll face a 10 percent early withdrawal penalty tax for cashing out your retirement funds before age 59 ½.

We’ve put together a guide with all the guidelines to follow in order to maximize your 401(k) benefits after you turn 59 ½.

The 401(k) Withdrawal Rules if You’re Over Age 59 ½

If you participate in your employer’s 401(k) plan, you likely know about the 10 percent penalty for withdrawing funds before age 59 ½. This rule is meant to discourage Americans from using retirement funds on non-retirement expenses.

After you turn 59 ½, you can make qualified distributions from your retirement accounts. Qualified distributions are penalty-free withdrawals from qualified retirement plans. However, remember that you’ll still pay ordinary income tax on the distributions if you’ve invested in a traditional 401(k). (Roth contributions are made with post-tax dollars, so distributions aren’t taxable.)

However, there are some exceptions to this early distribution rule. If you’re age 55 or older, you can gain penalty-free access to your retirement funds via the Internal Revenue Service (IRS) Rule of 55.

IRS Rule 72(t)

Rule 72t allows you to take substantially equal periodic payments (SEPPs) from your accounts, with no early penalty taxes. It doesn’t require proof of unemployment, disability, or death. All you need to do is take consistent withdrawals each year for the rest of your life, subject to regular income taxes.

If you continue to work after age 59 ½, make sure you’re aware of your 401(k) plan’s specific withdrawal rules.


you should understand your company’s vesting policies—you may be required to work for a certain number of years before your account becomes fully vested. With a vested account, all contributions from you and your employer are available for withdrawal. If you leave before that period is up, you may lose the money your employer has contributed to your 401(k) plan.


Before making a withdrawal, check to see whether your 401(k) plan permits in-service, non-hardship withdrawals. Some plans limit the amount you can withdraw—or your ability to withdraw at all—while you’re still working.

If you need to withdraw funds for an emergency, taking a loan from your plan might be a better option. If you just take the funds out of the plan without arranging a direct rollover (trustee-to-trustee transfer) to an IRA, every dollar you pocket will be taxed because the IRS considers a lump-sum retirement plan withdrawal to be regular income.

You’ll also need to know the mechanics of the distribution. For example:

  • Can you withdraw your earnings as well as your contributions? 
  • Can you withdraw any matching contributions your company has provided?
  • Is there a dollar ceiling on this type of distribution?
  • Does the plan itself penalize such withdrawals (as opposed to the IRS)?

Mandatory Cash-Outs

Your 401(k) plan may have rules about what will happen if your employer decides to end the plan and you receive an involuntary cash-out.

The 401(k) Withdrawal Rules if You’re Between 55 and 59 ½

In general, if you withdraw from your 401(k) before you reach age 59 ½, you’ll need to pay a 10 percent penalty. You’ll also be required to pay normal income taxes on the withdrawn funds.

However, you can withdraw your savings without a penalty at age 55 under certain circumstances.

Rule of 55

The IRS makes a special exception to the early withdrawal penalty with the Rule of 55. If you’re between age 55 and 59 ½ and you’ve been laid off, fired, or have quit your job, you can pull money out of your qualified retirement plan.

However, the Rule of 55 only applies to your most recent 401(k) or 403(b). You can withdraw only from the qualified retirement plan that you invested in while working in your last job. If you make distributions from an old 401(k) or 403(b), those funds are still subject to the early distribution penalty. You can get around this rule by rolling your old 401(k) or 403(b) funds into your current plan.

Avoiding Tax Penalties

You should also keep in mind that you don’t need to be retired to avoid triggering taxes or penalties.

For instance, you have a 401(k) with “A Company” and quit at age 57, you can access your retirement funds without penalty—even if you immediately take a job with “Z Company.” After a year, when you turn 58, you can retire for good and take advantage of penalty-free 401(k) distributions from both companies.

401(k) Required Minimum Distributions (RMDs)

The Setting Every Community Up for Retirement Enhancement (SECURE) Act made major changes to RMD rules.

If you turned age 70 1/2 in 2019, you must take your first RMD by April 1, 2020.

If you turned age 70 1/2 in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72.

Your 401(k) plan administrator will begin sending your yearly distributions from your account. The amount of your RMD is based on your account balance and life expectancy.

If you have multiple 401(k) accounts, you’ll take separate RMDs from each account. If you want to keep earning interest on your money for a little while longer, you can delay your first required minimum distribution until April 1 in the year after you reach age 72 (formerly age 70 1/2). After this instance, you’ll be required to take your RMDs by December 31.

If you don’t take your RMD, the IRS will impose an additional penalty of a whopping 50 percent of the amount that you failed to withdraw. If you’ve missed a $10,000 RMD, you’ll lose $5,000.

Exceptions to RMDs

401(k) RMD rules can be quite complicated, and the rules are generally not flexible. However, there is one special case: the “still-working” exception.

As long as you’re still employed by the company sponsoring your plan at age 70 1/2 and you don’t own 5 percent or more of that company, you may be able to avoid RMDs for as long as you remain employed—if your plan permits this.

The still-working exception holds even if the ongoing work is of a relatively limited nature. Note that the 5 percent ownership rule includes indirect ownership of stock owned by a spouse, children, grandchildren, and parents.

Once you leave that company, you’ll need to start taking withdrawals.

Note: This exception applies to 401(k)s only. If you have an IRA in addition to your 401(k), you’ll still be required to take your RMDs regardless of whether you’re still working at the time.

How to Avoid RMDs

One way to avoid RMDs (and the tax obligations they set off) is to roll over your traditional 401(k) to a Roth IRA.

Roth IRAs are funded with after-tax dollars, so unless you have a Roth 401(k), you’ll need to pay taxes when you transfer funds to a Roth IRA. The main advantages are that your money gets to continue growing tax-free, and your distributions will be tax-free. However, be sure to consult a Financial Advisor before moving money from a traditional 401(k) to a Roth account, as this can delay your eligibility for penalty-free withdrawals.

In addition, you aren’t required to take RMDs from your Roth IRA. Note that Roth 401(k)s, despite the fact they are also funded with after-tax money, are not exempt from RMDs.

Early Withdrawals: 401(k) vs. IRA

A quick note about early withdrawal rules concerning your 401(k) and your IRA: it’s likely that any funds you’ve rolled over from your 401(k) aren’t eligible for a penalty-free early withdrawal. However, there are exemptions; consult your Tax Advisor to find which specific exemptions apply to your situation.

We Can Help

Because of its special tax benefits, a 401(k) offers an excellent way to save for retirement. It’s also an effective way for employers to attract and retain top talent.

If you need help planning your retirement income strategy, please fill out the form below and we’ll get back to you shortly. We look forward to hearing from you.

[tcb-script type=”text/javascript” src=”” async=””][/tcb-script]

DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.

Thank you for reading our Blog Post

Related Posts

text written internal revenue service

2024 IRS Updates: 401(k), IRA, & More

The Internal Revenue Service (IRS) has announced significant updates for 2024, impacting various retirement plans, including 401(k), Individual Retirement Accounts

We're here to help

As your Fiduciary Registered Investment Advisory firm, we’re bound by law to put your interests above our own. We’re committed to maximizing your wealth within the constraints of your values and your life goals.

Our team of qualified and experienced experts is dedicated to building a positive, long-term relationship with you.
Prosperity Financial Group Logo

Allow us to help

As your Fiduciary Registered Investment Advisory firm, we’re bound by law to put your interests above our own. We’re committed to maximizing your wealth within the constraints of your values and your life goals.

Our team of qualified and experienced experts is dedicated to building a positive, long-term relationship with you.

Register for Prosperity Power Hour

Enjoy food and beverages, meet other successful professionals, improve your referral base, and win fun door prizes!

Because of the intimate nature of this event, we’re taking a very limited number of attendees per event. These seats will go fast, so grab one while you can!

Bringing a +1? Please have your guest fill out this form.