401(k) Distributions After Retirement Penalties

Retiring Early? Learn the rules for 401(k) distributions.

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Retirement plans such as 401(k)s are designed to provide for retirement security. Therefore, Congress has imposed penalties for withdrawals before age 55, even if you've already retired, and withdrawals before age 59 1/2 for those still working. Additionally, Congress imposes penalties for failing to take out the required amount of money each year beginning April 1 of the year after the year in which you turn 70 1/2.

Withdrawal Penalties

The IRS lifts the 10 percent penalty on withdrawals from retirement plans, including 401(k)s, IRAs, SEPs, SIMPLEs and 403(b) tax-sheltered annuity plans, made after the age of 59 1/2. But if you have been laid off, retired or otherwise separated from the service of your employer, you can begin taking distributions from a 401(k) plan penalty-free beginning at age 55. Before age 55, however, regardless of circumstance, all distributions are taxed with a 10 percent early withdrawal penalty, except as noted under Section 72(t), and for hardship distributions as allowed by your plan.

Section 72(t) Distributions

If you are younger than age 55 and you would like to retire early, you can also take penalty-free distributions under Section 72(t) of the Internal Revenue Code. You can begin taking income under Section 72(t) by committing to a series of substantially identical periodic withdrawals that are designed to last over your entire life expectancy or the joint life expectancy of you and one other individual, typically a spouse. You will still need to pay income taxes, but no 10 percent penalty will apply.

Required Minimum Distributions

The IRS does not allow you to defer taxes on 401(k) assets indefinitely. You must begin making withdrawals -- called "required minimum distributions," by April 1 of the year after the year in which you turn age 70 1/2. If you fail to take your minimum distribution as scheduled, the IRS will impose a penalty of 50 percent of the amount you were supposed to withdraw and did not.


If you take money out of your 401(k), your plan administrator must withhold 20 percent of the withdrawal and forward it to the IRS to offset expected income taxes on the withdrawal. However, if a 10 percent penalty applies, it will apply to the entire amount withdrawn, including the 20 percent you don't receive because it goes directly to the IRS.