When you started contributing to your 401(k), you probably didn’t expect to need those funds before retirement. However, financial emergencies and unexpected expenses can happen. If you’re considering taking money out of your 401(k) early, it’s important to make the most informed decision.

Join Heath Grossman, CFP® in this week’s Money Wisdom Question Series to learn more about the potential penalties, taxes, and exceptions that may apply to your situation.

Withdrawing Before Age 59½

Understanding the rules before accessing your retirement savings helps you avoid unexpected costs. If you withdraw money from your 401(k) before age 59½, you will generally face a 10% early withdrawal penalty. This is in addition to ordinary income taxes on the amount you withdraw. While there are some exceptions, most early withdrawals are subject to this penalty.

Withdrawing After Age 59½

Once you reach age 59½, you no longer face a 10% early withdrawal penalty. However, any money you withdraw from a traditional 401(k) is still typically subject to ordinary income taxes. Remember, all withdrawals must comply with the rules of your employer-sponsored plan.

Qualified Early Withdrawals

Depending on your unique situation, you may qualify for penalty-free early withdrawals before age 59½. These exceptions can include certain birth or adoption expenses, death or total and permanent disability, disaster recovery, and qualifying medical expenses.

The Rule of 55

Another important exception is the Rule of 55. This rule generally lets you withdraw money from your recent employer’s 401(k) plan without incurring a penalty. However, this only applies if you leave that employer during or after the year you turn 55. While regular income taxes may still apply, the Rule of 55 can provide additional flexibility later in your career.