Retirement Account Distributions and RMD Rules
Retirement accounts are designed to help you build long-term wealth, which is why the rules around taking money out matter so much. Whether you have a 401(k), Solo 401(k), or other qualified retirement plan, understanding distribution timing, taxes, penalties, and required minimum distributions (RMDs) can help you make more informed decisions.
When Can You Take Money From a 401(k)?
Generally, distributions from a traditional 401(k) are available without the 10% additional early-distribution tax once you reach age 59½. Traditional 401(k) distributions are generally taxable as ordinary income.
Taking money before age 59½ may trigger a 10% additional tax on the taxable amount, in addition to any federal and state income taxes due. However, several exceptions may apply.
One important exception is commonly called the “Rule of 55.” If you separate from service during or after the calendar year in which you turn 55, distributions from that employer’s 401(k) may avoid the 10% additional tax. This exception generally applies only to the plan of the employer you just left—not to an IRA or to 401(k) accounts from previous employers.
How to Access Your 401(k) While Still Employed
The availability of funds depends on your plan document and plan administrator. While still employed, most 401(k) plans generally do not allow elective-deferral withdrawals before age 59½, except in limited circumstances.
Depending on the plan, options may include:
- In-service withdrawals: Some plans allow withdrawals after age 59½ while you remain employed.
- 401(k) loans: If the plan permits loans, participants may generally borrow up to 50% of their vested balance, capped at $50,000. Loans must follow plan and IRS requirements to avoid becoming taxable distributions.
- Hardship distributions: A plan may permit a distribution for an immediate and heavy financial need, such as certain medical expenses, higher-education costs, preventing eviction or foreclosure, funeral expenses, or qualifying disaster-related expenses.
Hardship distributions are generally taxable and cannot be rolled into another retirement account. They may also be subject to the 10% additional tax unless a separate exception applies.
Other Exceptions to the 10% Early-Distribution Tax
The age-55 separation-from-service rule is only one exception. Depending on the circumstances, other exceptions may include distributions due to disability, death, a qualified domestic relations order (QDRO), certain unreimbursed medical expenses, an IRS levy, or substantially equal periodic payments.
The exception rules are technical, and the facts matter. Before taking an early distribution, consult your tax adviser and your plan administrator.
Required Minimum Distributions: The Basics
A required minimum distribution, or RMD, is the minimum amount that must be withdrawn each year from certain retirement accounts after you reach the applicable age.
For most traditional 401(k) and traditional IRA owners, the RMD starting age is 73. For individuals born in 1960 or later, the applicable starting age increases to 75.
For a 401(k), the required beginning date is generally April 1 of the year following the later of:
- The calendar year you reach the applicable RMD age; or
- The calendar year you retire.
However, this “still working” delay may not apply to a 5% owner of the business sponsoring the plan. In addition, individual plan documents may require distributions to begin earlier.
Your first RMD may be delayed until April 1 of the following year, but doing so can result in two taxable distributions in that year: the delayed first RMD and the next annual RMD, which is due by December 31.
Important RMD Reminders
- RMDs from employer plans are generally calculated separately for each plan.
- A distribution from one qualified plan generally cannot be used to satisfy the RMD for another qualified plan.
- RMDs are not eligible for rollover.
- Roth IRAs do not have lifetime RMDs for the original account owner. Designated Roth accounts in workplace plans also no longer have lifetime RMDs for the original owner.
- Missing an RMD can result in an excise tax, although the penalty may be reduced or waived in certain circumstances if corrected promptly.
Consider Your Distribution Strategy
A distribution should fit within your broader tax, retirement-income, and estate-planning strategy. You may have choices such as periodic payments, lump-sum distributions, leaving assets in the plan, or completing a direct rollover to an IRA or another eligible retirement plan.
A direct rollover can help preserve tax deferral and avoid the mandatory 20% withholding generally applied when an eligible distribution is paid directly to you. Remember: RMDs and hardship distributions cannot be rolled over.
The right approach depends on your age, employment status, account type, cash-flow needs, tax bracket, and long-term investment goals.
Frequently Asked Questions About 401(k) Distributions and RMDs
What age can I withdraw money from my 401(k) without a penalty?
Generally, you can take distributions from a traditional 401(k) without the 10% additional early-distribution tax after age 59½. Traditional 401(k) withdrawals are generally still subject to ordinary income tax.
Can I access my 401(k) at age 55?
Possibly. If you leave your employer during or after the calendar year you turn 55, you may be able to take penalty-free distributions from that employer’s 401(k). This “Rule of 55” does not generally apply to IRAs or to 401(k) accounts held with former employers.
Can I withdraw from my 401(k) while I am still working?
It depends on your plan. Many plans do not permit withdrawals while you are employed before age 59½. Some may allow in-service withdrawals after age 59½, 401(k) loans, or hardship distributions if the plan document permits them.
What is a 401(k) hardship withdrawal?
A hardship withdrawal is a distribution a plan may allow for an immediate and heavy financial need. Examples may include certain medical expenses, education expenses, avoiding eviction or foreclosure, funeral expenses, and certain disaster-related costs. Hardship distributions are generally taxable, may be subject to an additional 10% tax, and cannot be rolled over.
How much can I borrow from my 401(k)?
If your plan allows loans, you may generally borrow up to 50% of your vested account balance, up to $50,000. The loan must meet IRS and plan requirements, including repayment terms, to avoid being treated as a taxable distribution.
At what age do required minimum distributions begin?
For many retirement account owners, RMDs begin at age 73. For people born in 1960 or later, the applicable RMD age is 75. Your specific required beginning date may vary based on your employment status, plan type, and ownership interest in the sponsoring employer.
Do I have to take RMDs if I am still working?
You may be able to delay RMDs from your current employer’s 401(k) until retirement if the plan permits it. This exception generally does not apply if you own more than 5% of the business sponsoring the plan. Traditional IRAs do not have a still-working exception.
Can I take my first RMD later than the year I reach RMD age?
Yes. Your first RMD may generally be delayed until April 1 of the following year. However, you must also take the next year’s RMD by December 31, which can result in two taxable distributions in the same calendar year.
Can I roll over an RMD into an IRA?
No. Required minimum distributions are not eligible for rollover. You must take the RMD first; additional eligible funds may be rolled over separately.
Do Roth accounts have RMDs?
Roth IRAs do not have lifetime RMDs for the original account owner. Designated Roth accounts in workplace retirement plans also generally do not have lifetime RMDs for the original account owner.
What happens if I miss an RMD?
A missed RMD can result in an excise tax. The penalty may be reduced if the missed distribution is corrected promptly and may be waived in certain circumstances. Contact a qualified tax professional if you believe you have missed an RMD.
Retirement-account distribution rules are complex and depend on your plan document and personal circumstances. Consult your plan administrator and qualified tax or financial adviser before taking a distribution.
This article is for educational purposes only and is not tax, legal, or investment advice. Consult a qualified tax or financial professional and your plan administrator before taking a retirement-account distribution.
Sources: IRS: 401(k) Resource Guide—Plan Participants | IRS: Required Minimum Distributions | Investopedia: 401(k) Withdrawal Rules
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