You can transfer money from a 401k to a bank account once you’re eligible to take a distribution, but the amount you move is taxed as ordinary income and generally carries a 10 percent early withdrawal penalty if you’re younger than 59½. Eligibility depends on whether you still work for the employer sponsoring the plan, your age, and the type of distribution your plan allows. A few alternatives, including a 401k loan or a direct rollover, can get you cash or preserve the tax shelter without the same hit.
Are You Eligible to Take the Money Out?
While you’re still working for the employer that sponsors the plan, federal rules and the plan document sharply limit access to your own elective deferrals. You generally have to wait for one of these events:
- You leave the job through quitting, layoff, or retirement.
- You reach age 59½. Most plans allow penalty-free withdrawals at that point regardless of employment status.
- You experience a qualifying hardship and the plan specifically permits hardship withdrawals.
- The plan terminates with no replacement plan set up.
- You die or become disabled.
Employer matching and profit-sharing contributions can follow different withdrawal rules, so the summary plan description is the place to confirm what applies to your account.
If your plan allows hardship withdrawals, the IRS recognizes safe-harbor reasons including medical expenses, costs to prevent eviction or foreclosure, funeral expenses, and certain home repairs after a federally declared disaster. Hardship withdrawals cannot be rolled over, and they’re subject to income tax plus the 10 percent penalty if you’re under 59½.
What the Transfer Will Actually Cost
The dollar figure on your account statement is not what lands in your checking account. Three things come out along the way.
Mandatory 20 Percent Federal Withholding
When you take a cash distribution that could have been rolled into another retirement account but you choose to receive it instead, the plan must withhold 20 percent for federal income taxes. You cannot opt out. On a $10,000 eligible rollover distribution taken as cash, you receive $8,000 and $2,000 goes to the IRS.
Certain distributions carry a lower default withholding of 10 percent, including hardship withdrawals, required minimum distributions, and substantially equal periodic payments. You can elect out of the 10 percent on those if you’d rather handle estimated tax payments yourself.
Withholding is a prepayment toward what you actually owe. If too much came out, you get the difference back as a refund. If too little came out for your bracket, you owe the balance at filing time.
Income Tax and the 10 Percent Penalty
The full taxable amount counts as ordinary income for the year you receive it, on top of your wages and other income. If you’re under 59½ and no exception applies, an additional 10 percent tax stacks on top of the regular income tax.
State Income Tax
About 13 states impose no tax on retirement distributions, either because they have no income tax or because they specifically exempt retirement income. The rest tax 401k distributions as ordinary income, and some require mandatory state withholding at the time of the distribution.
The Roth 401k Difference
If your contributions went into a designated Roth 401k, a qualified distribution comes out entirely tax-free, including earnings. Qualified means the distribution is made after age 59½ (or on account of death or disability) and after a five-taxable-year period of participation. The five-year clock starts on January 1 of the year you first made Roth contributions to that plan. A nonqualified Roth distribution is partially taxable: your original contributions come out tax-free, but the earnings portion is taxable and may be hit with the 10 percent penalty.
Exceptions to the 10 Percent Penalty
The 10 percent additional tax has a long list of exceptions. Regular income tax still applies to pre-tax money; only the extra 10 percent goes away.
- Separation from service at age 55 or older (age 50 for state or local public safety employees), for distributions from that employer’s plan.
- Substantially equal periodic payments based on your life expectancy, taken at least annually. Once started, the schedule must continue for five years or until you reach 59½, whichever is later.
- Total and permanent disability.
- Unreimbursed medical expenses above 7.5 percent of AGI, limited to the amount over that threshold.
- Distributions to an alternate payee under a Qualified Domestic Relations Order.
- Up to $5,000 per child for qualified birth or adoption expenses.
- Up to $22,000 for economic loss from a federally declared disaster.
- Domestic abuse victim distributions of up to the lesser of $10,000 or 50 percent of the account, for distributions after December 31, 2023.
- Distributions after a physician certifies a terminal illness.
- Amounts seized by the IRS through a levy on the plan.
- Military reservists called to active duty.
Each exception has its own eligibility rules, and the plan document must permit the distribution type in the first place.
How to Request the Transfer
Once you’re eligible, the request itself is paperwork. Have your plan participant ID, your bank’s nine-digit routing number, and your personal account number ready for the electronic deposit instructions. Most administrators provide a distribution election form through the benefits portal or HR office, where you specify the dollar amount or percentage and choose between direct deposit and a mailed check.
If your plan is subject to the qualified joint and survivor annuity rules, your spouse has to provide written consent before a lump-sum distribution can be paid to you. The consent acknowledges the effect of waiving survivor benefits and must be witnessed by a plan representative or a notary. Many 401k plans opt out of the annuity requirements through a profit-sharing structure, in which case this step doesn’t apply. If you’re unmarried, it also doesn’t apply.
Submit through the plan’s online portal, by mail, or by phone with a plan representative. Some administrators require a follow-up identity verification call before releasing funds. Most plans process distributions within five to ten business days once the underlying investments are liquidated. Some administrators charge a processing fee, usually a flat amount deducted from your balance before the transfer.
After the distribution, the plan administrator sends Form 1099-R by January 31 of the following year showing the amount distributed and the federal tax withheld. You’ll need it to file your return.
Ways to Avoid or Reduce the Tax Hit
401k Loan
If your plan offers loans, borrowing from your 401k gets you cash without income tax or the 10 percent penalty, as long as you repay on schedule. The maximum is the lesser of 50 percent of your vested balance or $50,000. If 50 percent of your balance is less than $10,000, you can borrow up to $10,000. Repayment generally runs on at least a quarterly schedule over five years, longer for loans used to buy a primary residence.
If you leave the job before the loan is repaid, the plan sponsor can require you to pay the full outstanding balance. Any unpaid amount becomes a taxable distribution reported on Form 1099-R. You can avoid that by rolling the unpaid balance into an IRA or another eligible retirement plan by the due date (including extensions) for filing your federal return that year.
Direct Rollover
If you don’t need the cash right away, a direct rollover (trustee-to-trustee transfer) into an IRA or another employer’s plan avoids the 20 percent withholding entirely. No taxes are withheld, and the money stays tax-deferred. You can then withdraw from the IRA on your own schedule under the IRA withholding and tax rules.
Indirect Rollover
With an indirect rollover, the plan pays you personally and you have 60 days to redeposit some or all of it into a qualified retirement account to avoid tax on the redeposited amount. Anything you keep past 60 days is treated as a taxable distribution. The plan still withholds 20 percent up front, so to roll over the full amount you’d need to replace that withheld portion from other funds.
SECURE 2.0 Emergency Withdrawal
Starting in 2024, the SECURE 2.0 Act allows a penalty-free withdrawal for personal or family emergencies of up to the lesser of $1,000 or your vested balance above $1,000, once per calendar year. If you repay the amount within three years, you can take another emergency withdrawal. Otherwise, no additional emergency withdrawals are available until the repayment is made.
What Changes at Age 73
Once you reach age 73, the IRS generally requires you to start taking annual withdrawals from your 401k, called required minimum distributions. Your first RMD must be taken by April 1 of the year after you turn 73. If you’re still working for the employer sponsoring the plan and don’t own more than 5 percent of the company, some plans allow you to delay RMDs until you actually retire.
Missing an RMD carries a 25 percent excise tax on the amount you should have withdrawn, dropping to 10 percent if you correct the shortfall within two years. RMDs count as taxable income in the year you receive them.