When Can I Withdraw Money From My Retirement Plan — and What Are the Penalties?

Saving for retirement is one of the most important financial decisions you can make. But equally important is understanding when and how you can withdraw the money you’ve saved. Taking funds out too early can lead to taxes, penalties, and long-term consequences for your financial security. Taking money out too late—or too aggressively—can also cause problems, such as running out of savings in retirement.

This guide explains:

• When you’re allowed to withdraw from common retirement accounts

• What penalties apply for early withdrawals

• Exceptions that allow penalty-free access

• How “safe withdrawal” strategies protect you once you retire

1. When You Can Withdraw Money From Common Retirement Accounts

Withdrawal rules vary by account type, but the IRS generally sets age 59½ as the earliest point when you can take money out of most tax-advantaged retirement accounts without a penalty.

Here’s what that looks like by account:

Traditional IRA

• Penalty-free withdrawals: Age 59½

• Taxes: Withdrawals are taxed as ordinary income.

• Required Minimum Distributions (RMDs): Must begin at age 73 (currently).

Roth IRA

• Contributions: Can be withdrawn anytime, tax- and penalty-free.

• Earnings: Tax- and penalty-free only if:

  • You’re at least 59½, and

  • The account is at least five years old (the “five-year rule”).

• No RMDs during the owner’s lifetime.

401(k), 403(b), or TSP Accounts

• Penalty-free withdrawals: Age 59½

• Taxes: Withdrawals are taxable as income (unless Roth contributions).

• RMDs: Start at age 73 for traditional accounts.

Many employer plans also allow in-service withdrawals or loans, but rules vary and must be checked with your plan administrator.

2. Early Withdrawal Penalties and Taxes

If you withdraw money before age 59½, the consequences typically include:

The 10% Early Withdrawal Penalty

This penalty applies to most early withdrawals from:

• Traditional IRAs

• 401(k), 403(b), TSP

• Roth IRA earnings

Regular Income Tax

Early withdrawals from tax-deferred accounts (traditional IRA, traditional 401(k)) are taxed as ordinary income—in addition to the 10% penalty.

Exceptions to the 10% Penalty

The IRS provides several situations in which the penalty is waived (although taxes usually still apply). Common exceptions include:

• Disability

• A first-time home purchase (up to $10,000) from an IRA

• Higher education expenses (IRA only)

• Substantially Equal Periodic Payments (SEPP / 72(t) withdrawals)

• Unreimbursed medical expenses exceeding a percentage of AGI

• Health insurance premiums while unemployed (IRA only)

• Birth or adoption expenses (up to $5,000)

• Active duty military withdrawal in some cases

• Death (beneficiaries do not pay the penalty)

Note: 401(k) plans have fewer exceptions than IRAs unless the plan explicitly allows them.

3. Special Retirement Plan Withdrawal Rules

a. The Age 55 Rule (401(k)/403(b))

If you leave your job (retired, laid off, or quit) in the year you turn 55 or later, your employer-sponsored plan may allow penalty-free withdrawals.

This does NOT apply to IRAs—only the plan from the job you left.

b. Roth 401(k) vs. Roth IRA Withdrawals

Roth 401(k) withdrawals follow the 59½ + five-year rule but do not allow tax-free withdrawals of contributions at any time the way Roth IRAs do.

c. Required Minimum Distributions (RMDs)

Starting at age 73, you must withdraw minimum amounts from:

• Traditional IRAs

• Traditional 401(k)/403(b)

• Roth 401(k) (unless rolled into a Roth IRA)

Failure to take an RMD results in penalties (though recent law changes have reduced them).

4. Why Not to Withdraw Early: The Hidden Costs

Many people consider dipping into retirement savings for emergencies or major expenses. But early withdrawals come with costs beyond taxes and penalties:

a. Loss of Tax-Deferred (or Tax-Free) Growth

The greatest advantage of retirement accounts is compounding. A $10,000 withdrawal today could cost you $30,000–$80,000 in long-term growth, depending on your age and assumptions.

b. Reduced Retirement Security

One of the top risks in retirement planning is simply running out of money too soon. Early withdrawals increase this risk significantly.

c. Opportunity Cost

Money inside retirement accounts is sheltered from taxes on investment gains. Once withdrawn (and possibly spent), rebuilding that balance can take years.

5. “Safe Withdrawal” Strategies in Retirement

Once you reach retirement, the challenge shifts: how much can you safely withdraw each year without depleting your savings?

This is known as the safe withdrawal rate.

The 4% Rule (Classic Approach)

A traditional guideline suggests:

• Withdraw 4% of your portfolio in your first year of retirement

• Adjust that dollar amount for inflation each year

Historically, this has meant your portfolio should last a 30-year retirement.

But: markets, inflation, and longevity trends have changed. Modern advisors often use 3%–4% depending on risk, age, and portfolio.

Dynamic Withdrawal Strategies

Some retirees prefer more flexible rules, such as:

• Guardrails: Increase withdrawals after strong years, reduce after weak years

• Fixed percentage: Withdraw a constant % of portfolio each year (income varies)

• Bucket strategies: Keep short-term cash separate from long-term investments

Why Withdrawal Strategy Matters

A poor withdrawal strategy increases the risk of:

• Running out of money late in life

• Being forced to sell investments during a market downturn

• Overspending early in retirement

• Leaving too little for emergencies or healthcare costs

A good strategy balances:

• Income needs

• Investment growth

• Market volatility

• Longevity risk

6. Practical Tips for Smart Retirement Withdrawals

Before Retirement

• Keep retirement accounts untouched unless absolutely necessary

• Build an emergency fund outside retirement accounts

• Consider rolling old 401(k)s into an IRA for greater withdrawal flexibility

• Know your tax bracket before withdrawing

At Retirement

• Coordinate withdrawals with Social Security timing

• Use Roth accounts strategically for tax-planning

• Manage RMDs to avoid penalties

• Monitor your withdrawal rate each year

Throughout Your Retirement

• Keep an eye on investment performance

• Adjust spending to preserve long-term sustainability

• Revisit your plan annually

• Consider working with a financial planner for complex situations

7. Summary: Key Takeaways

• 59½ is generally the earliest age for penalty-free withdrawals.

• Withdrawals from tax-deferred plans are taxed as income.

• Early withdrawals often incur a 10% penalty, but several exceptions exist.

• Roth IRAs offer the most flexible withdrawal rules (contributions anytime).

• Understanding a safe withdrawal strategy is crucial to ensuring you don’t outlive your savings.

• Retirement planning works best when you know the rules and take a long-term, disciplined approach.