How to Make an Early Withdrawal From Your 401(k) Penalty-Free

Daniel Penzing
Written by
Last update:

72(t) Distributions: Substantially Equal Payments

“The IRS has said that it's OK to take penalty-free withdrawals from a 401(k) plan if you're 5 years from retirement. What if you're younger than that but retire early with no other retirement savings or assets? Here's the IRS's rules in a nutshell:

  • If you leave your job before you turn 55, you must take substantially equal periodic payments from your 401(k) or you pay the 10% penalty tax on the money.
  • If you take substantially equal periodic payments (72(t) payments) from your 401(k), the payments must last for life – to infinity.
  • The 72(t) payments must be made at or within three years of age 70. You need to continue taking the payments every year.
  • The payments must be based on your life expectancy or the joint life expectancy of you and your beneficiary. A pension payment plan administrator can help you determine your life expectancy or your joint life expectancy.
  • If you have an outstanding loan on your 401(k), the 72(t) payments must be made from the 401(k) account that holds the loan.
  • You can't take a loan from your 401(k), and take 72(t) payments from a different account.

Separating From Service at Age 55 or Older

In certain situations, you might need to make an early withdrawal. Retirement-age individuals can typically receive early distributions from their 401(k) plans without incurring a penalty.

According to Internal Revenue Service (IRS) rules, if you are designated as “separate from service,” you can take an early distribution of any balance in the account, including both pretax and after-tax contributions, without incurring a 10% early-distribution penalty.

Note that the separation from service needs to have occurred after the individual attained age 55, and not just on account of the age of the account owner. The separation also needs to be permanent in nature.