Congress has determined that 401(k) and other company plan funds, with certain exceptions, should be saved for retirement. For that reason, it has imposed strict restrictions on the ability of employees to withdraw from these plans while still working.
Plans must follow these rules, or they risk losing their tax-qualified status. But plans are free to impose even stricter rules than required by the tax code. So, check your plan written summary or ask your plan administrator or HR rep for the particular withdrawal rules that apply to your plan.
Restrictions on Withdrawals:
Each 401(k) account has its own restriction rules:
Pre-tax and Roth Employee Contributions
Generally, 401(k) plans can’t allow in-service distributions from pre-tax and Roth employee contribution accounts before age 59 ½. But withdrawals from these accounts are available, if the plan allows, in case of financial hardship, disability or birth or adoption, and for active reservists. Plans also may allow SECURE 2.0 withdrawals (discussed below).
After-tax Contributions
Plans that offer non-Roth after-tax contributions can allow those contributions and their earnings to be withdrawn at any time, even before age 59 ½. This would be helpful if employees are able to use the “Mega Backdoor Roth” strategy to convert after-tax contributions to Roth IRAs.
Emergency Savings Contributions
Employers can offer lower-paid workers a special account within a 401(k) plan for emergency savings contributions made on a Roth basis. Withdrawals from these accounts are available at least monthly.
Employer Contributions
Most plans that allow in-service withdrawals from employer contribution (matching or nonelective/across-the-board) accounts follow the same rules that apply to pre-tax and Roth employee contribution accounts. This simplifies plan administration. But plans can be more liberal and allow withdrawals at a specified age (even earlier than 59 ½), after at least five years of plan participation or after the contribution has been in the plan for at least two years.
Rollover Contributions
Some 401(k) plans allow employees to roll over pre-tax retirement accounts, including IRAs, into the plan. Plans can allow in-service withdrawals from rollover contribution accounts at any time, regardless of age or service. But this is not mandatory and here again, many plans apply the same rules that apply to pre-tax and Roth employee contribution accounts.
SECURE 2.0 Withdrawals
The SECURE 2.0 law adds several new in-service withdrawals that can be made from any 401(k) account. These are withdrawals for: federally-declared disaster expenses, terminal illness, victims of domestic abuse, and emergency expenses. (In-service withdrawals to pay for long-term care premiums become available in 2026.) These withdrawals can be taken at any age, but withdrawals for terminal illness are only available if the employee is otherwise eligible for a withdrawal (for example, because of financial hardship). Note that plans are not required to offer any of these SECURE 2.0 withdrawals.
Taxation
In-service withdrawals of pre-tax 401(k) funds are taxable and, if made before 59 ½, may be subject to penalty. A Roth 401(k) withdrawal that is a “qualified distribution” comes out completely tax-free. If not qualified, the earnings part of a Roth withdrawal is taxable under a pro-rata rule. The earnings portion of each withdrawal of non-Roth after-tax contributions is always taxable on a pro-rate basis.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Investment advisory services offered through Donato Wealth Management, PLLC, dba Empower Wealth Management and Empower Wealth & Tax (“Empower Wealth Management” or “EWM”),
an SEC registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional adviser before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned, or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Personal investment advice can only be rendered after the engagement of EWM, execution of required documentation, and receipt of required disclosures. All investment and insurance strategies have the potential for profit or loss. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. Past performance is no guarantee of future results. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD #305031.
Insurance products and tax services are offered through Senior Tax and Insurance Advisors, PLLC, dba Empower Wealth Group (“Empower Wealth Group” or “EWG”). Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products offered through EWM. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. EWG is not affiliated with or endorsed by the U.S. Government, Social Security Administration, nor the federal Medicare program. You may be contacted by a licensed insurance agent. Calling the number above will direct you to a licensed insurance agent. EWG may not offer every plan available in your area. Any information provided is limited to plans available in your area. Please contact Medicare.gov or 1-800-MEDICARE.
EWM and EWG are both affiliated companies of Empower Wealth, LLC (“Empower”). Investment adviser representatives of EWM may have a financial incentive to recommend tax and insurance products and/or services offered through EWG which presents a conflict of interest. This conflict is addressed by EWM’s adoption of its Code of Ethics, which requires that all EWM’s Associated Persons place the interest of clients ahead of their own. Clients of EWM are also free to choose their own tax and/or insurance professionals and are under no obligation to utilize the services offered through any related entities or persons associated with Empower.
Strategic Partners listed on this page are not employees of EWM and are not affiliated through common ownership.
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.
© Empower Wealth Management All Rights Reserved.