When can you withdraw from your 401(k)? This is really a three-part question:
- When can you withdraw?
- What tax will you owe?
- What penalty will you owe?
When can you withdraw from your 401(k)?
First, let’s take a step back and look at different retirement accounts you may have at work.
- A 401(k) is a retirement account with a for-profit employer. This could be a private EM group, or you if you do locums work.
- A 403(b) is a retirement account with a nonprofit employer, like an academic or nonprofit hospital.
A 401(k) and a 403(b) behave similarly in terms of when you can withdraw. We’ll refer to a 401(k) going forward.
You can withdraw from your 401(k) when the terms of the plan allow it. We’ll discuss two relevant times: separation from service and being over age 59.5. Many plans also permit hardship withdrawals; check your plan if this is of interest.
Note: Some people have another retirement account at work called a 457 plan. We’ll write a future post about 457s.
Separation from service
You can withdraw from your 401(k) after you separate from service, no matter what age you are. You can roll the money tax-free and penalty-free into another 401(k) or IRA, or you can withdraw payable to yourself. The rest of this post focuses on withdrawing payable to yourself.
In most cases, you can’t withdraw from your 401(k) if you’re under age 59 1/2 and still working for this employer. Check your plan to be sure.
After age 59.5
After age 59.5, you can usually withdraw from your 401(k) even if you’re still working for this employer. Check your plan to be sure.
What tax will you owe?
Pre-tax 401(k)
Withdrawals from a pre-tax 401(k) are taxed as ordinary income.
How much tax you’ll owe depends on your individual situation:
- A full-time practicing ER doc will pay at least 24% federal income tax, if not 32% or more (2022), plus state income tax if any.
- A retired ER doc could pay as little as 12% federal income tax (2022) with careful planning.
Roth 401(k)
Withdrawals from a Roth 401(k) are tax-free in two cases: withdrawal of contributions, and qualified distributions.
Withdrawal of contributions
Withdrawals of Roth 401(k) contributions are tax-free. However, each Roth 401(k) withdrawal is treated as part contributions and part earnings.
Example: Say you’ve contributed $50K to your Roth 401(k) and it’s now worth $100K.
In this case, if you withdraw $50K, it’s treated as $25K contributions (tax-free) and $25K earnings (tax-free if the distribution is qualified).
Qualified distributions
A distribution from a Roth 401(k) is qualified, and therefore tax-free, if you meet both of the following conditions:
- You’ve had this Roth 401(k) for at least five years. A Roth 401(k) at a different employer doesn’t count.
- The distribution is:
- Made on or after the date you reach age 59.5; or
- Made due to disability; or
- Made due to death.
In the example above, your Roth 401(k) now has $50K left in it: $25K contributions and $25K earnings. If you withdraw $50K, you’ve had this Roth 401(k) for at least five years, and you’re over age 59.5, your entire $50K distribution is qualified and therefore tax-free.
What penalty will you owe?
Before age 55
A special rule for 401(k)s and 403(b)s may let you withdraw as early as age 55 without penalty. To qualify, you must have separated from service with that employer during the year you turn 55 or later.
This is easiest to illustrate with examples.
- No penalty: You leave EM Group A at age 55, and withdraw from EM Group A’s 401(k) plan.
- Penalty: You leave EM Group A at age 52, and withdraw from EM Group A’s 401(k) plan.
- Penalty: You leave EM Group A at age 55, and withdraw from EM Group B’s 401(k) plan where you used to work.
- Penalty: You leave EM Group A at age 55, and withdraw from an IRA.
If you plan to leave your current employer during the year you turn 55 or later, you can get around the penalty on your other retirement accounts too. Roll those into your current 401(k) before you separate from service, then withdraw from your current 401(k). A few caveats:
- Your current 401(k) must accept incoming rollovers. Many do, but some don’t.
- Pre-tax IRA and 401(k) dollars can be rolled into your current 401(k) if the plan accepts rollovers.
- Only Roth 401(k) dollars can be rolled into your current plan. Roth IRA dollars can’t be rolled in.
Before age 59.5
Unless you meet the age 55 test above, 401(k) withdrawals before age 59.5 are subject to a 10% early withdrawal penalty. Your state may tack on a penalty too.
There are several exceptions to the 10% penalty. A full list is here. The most relevant ones for ER docs are below.
- Disability.
- Death.
- First-time home purchase (up to $10K lifetime limit).
After age 59.5
There is no 10% penalty on 401(k) withdrawals after age 59.5.
Withdrawals of Roth 401(k) earnings over age 59.5 are subject to tax, but not penalty, if you haven’t had this Roth 401(k) for five years.
We help ER docs get the income they need in retirement, as tax-efficiently as possible. To learn more, schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.
