Your 401(k) at 59½: what changes
At 59½, the 10% early-withdrawal tax generally stops applying. Income tax still applies to most withdrawals, and your plan sets its own rules.
| Option | Upside | Downside |
|---|---|---|
| Leave it in the old plan | ✓ Nothing to move now | ✗ You cannot add new money. Old plan fees may still apply. |
| Move it to a new employer plan | ✓ One account to manage | ✗ Only if the new plan accepts transfers. Fees differ. |
| Roll it to an IRA | ✓ Often a wider range of investments | ✗ IRA fees vary by provider. Plan loans do not carry over. |
| Cash it out | ✓ Money is available now | ✗ Taxed as income. 20% withheld. A 10% extra tax applies before 59½ unless an exception applies. |
Source: https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-rollovers and https://www.finra.org/rules-guidance/notices/13-45 and https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions and https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
The 10% tax before and after 59½
Before 59½, a 10% extra tax generally applies to early withdrawals. From 59½ on, that extra tax generally does not.
Ask about withdrawals while you work
Some plans allow withdrawals while you still work after 59½. The plan decides, so ask the administrator.
Know the rule of 55 exception
Leaving that employer in or after the year you turn 55 can avoid the 10% tax on that plan. IRAs do not get this exception.
Check the withdrawal forms
Each plan has its own withdrawal forms and processing time. Ask for the forms and timing in writing.
Consider the tax year
A pre-tax withdrawal counts as income in the year you take it. Plan timing around other income for that year.
Common questions
Does 59½ change the 20% withholding?
No. The 20% withholding applies to plan payouts paid to you at any age.
Where are my plan's withdrawal rules?
The summary plan description lists withdrawal ages and options. Ask the administrator if anything is unclear.
Can I still roll my money to an IRA at 59½?
Yes, the four options still apply. A direct rollover avoids tax on the move, while a cash-out is taxed as income.
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