In the video above, Aaron Rheaume, CKA® and Sam Neff, CFP®, discuss the key considerations retirees face when withdrawing from a 401k — including taxes, investment risk, and why many people roll their 401k into an IRA before taking income.
This article builds on that conversation, answering the most common questions people have when searching “how to withdraw from a 401k” and highlighting what many guides overlook.
Understanding How 401k Withdrawals Work
A 401k is designed primarily as a tax-deferred savings vehicle. For most people, contributions were made directly from their paycheck before taxes, allowing the account to grow without annual tax drag.
Eventually, though, the money must come out — and when it does, the IRS wants its share.
As Sam Neff, CFP®, leader of the planning team at Financial Enhancement Group (FEG), explains:
“When it comes time to withdraw from a 401k, it’s not just as simple as needing a thousand dollars for an expense. We have to consider what the tax is going to be when the money comes out.”
That’s why understanding timing, taxation, and strategy matters so much.
Withdrawing From a 401k at Retirement Age (59½ and Older)
Once you reach age 59½, you can generally withdraw money from your 401k without paying the 10% early withdrawal penalty. However, that does not mean withdrawals are tax-free.
How 401k Withdrawals Are Taxed
- Traditional 401k withdrawals are taxed as ordinary income
- Withdrawals increase your taxable income for the year
- Large withdrawals can push you into a higher tax bracket
Required Minimum Distributions (RMDs)
Eventually, withdrawals become mandatory.
Under current rules, Required Minimum Distributions (RMDs) begin at age 73 for most retirees. Once RMDs start:
- You must withdraw at least a minimum amount each year
- Missed RMDs can trigger significant IRS penalties
- RMDs from pre-tax accounts are fully taxable
Planning for RMDs well in advance is a key part of long-term retirement strategy.
Why Many Retirees Roll Their 401k Into an IRA
One of the most common and flexible strategies is to roll a 401k into an IRA before beginning withdrawals.
Sam Neff explains why this is often recommended:
“We tend to recommend that folks look at going the IRA route with their 401k assets. You take the money that’s been in your 401k and put it into an IRA account, and then you can create a distribution strategy with the proper tax withholdings.”
Benefits of Rolling a 401k Into an IRA
- Greater control over how and when withdrawals occur
- Easier customization of tax withholding
- Broader investment options
- Clear separation of Roth and pre-tax assets
- Less friction than employer plan rules
Employer 401k plans often limit distribution flexibility. IRAs typically remove those constraints.
Investment Risk When You Start Taking Money Out
Saving for retirement and spending in retirement are two very different phases.
While you were working, consistent contributions helped smooth market volatility. Once withdrawals begin, a different risk appears: sequence of return risk.
Sam Neff explains it this way:
“When folks are starting to remove money from these accounts, we want to make sure those assets are less volatile money. You don’t want to be selling investments during a market downturn if you can avoid it.”
Without proper planning, early-retirement market downturns can permanently damage long-term income sustainability.
Withdrawing From a 401k Before Age 59½
Many people searching for “how to withdraw from a 401k” are actually exploring early access. While this guide focuses primarily on retirement-age planning, early withdrawal rules are important to understand.
Early Withdrawal Penalties
If you withdraw from a 401k before age 59½, you will usually face:
- Ordinary income tax
- A 10% early withdrawal penalty
That combination can significantly reduce the amount you receive.
Penalty Exceptions
Some limited exceptions may apply, including:
- Separation from service at age 55 or older (Rule of 55)
- Disability
- Certain medical expenses
- Structured IRS withdrawal programs
Even when penalties are avoided, taxes usually still apply, and early withdrawals permanently reduce retirement savings.
Hardship Withdrawals and 401k Loans
Some employer plans allow hardship withdrawals or loans.
- Hardship withdrawals are taxable, often irreversible, and reduce retirement savings permanently
- 401k loans must be repaid; if not, they become taxable distributions
As Aaron Rheaume, CKA®, partner at FEG, notes:
“This conversation is really designed for someone who has passed retirement age. If there’s a dire need, there may be ways to access funds — but this is about building long-term income strategies.”
What Most 401k Withdrawal Articles Miss — and Why It Matters to You
Many articles explain the rules around 401k withdrawals. Far fewer explain how those rules actually play out in real life — on your taxes, your healthcare costs, your confidence, and your ability to enjoy retirement.
Here are some of the most important things commonly overlooked, and why they matter as you plan your life after work.
1. “Penalty-Free” Does Not Necessarily Mean “Smart”
Most guides focus heavily on avoiding the 10% early withdrawal penalty. While that’s important, it’s often only a small part of the story.
Even penalty-free withdrawals can:
- Push you into higher tax brackets
- Increase how much of your Social Security becomes taxable
- Trigger higher Medicare premiums (IRMAA)
- Reduce your flexibility later in retirement
Why this matters to you:
If you focus only on penalties, you may unintentionally give up far more in taxes and lost flexibility over time. For many retirees, the real opportunity is managing lifetime taxes, not just avoiding a one-time fee — something that’s difficult to see without a broader plan.
2. Medicare Premiums Can Quietly Increase
Few articles mention that large 401k withdrawals can raise Medicare Part B and Part D premiums through income-based adjustments — sometimes for more than one year.
Why this matters to you:
These increases often arrive as a surprise, long after the withdrawal is taken. Without awareness, a single decision can permanently raise healthcare costs during a phase of life when predictability matters most.
3. The Emotional Shift From Saving to Spending Is Real
After decades of being rewarded for saving and deferring gratification, many retirees find it surprisingly hard to start spending — even when they’ve planned responsibly.
Why this matters to you:
A withdrawal strategy isn’t just about math. It’s about helping you spend with confidence, not anxiety. When people don’t feel secure in their plan, they often underspend and quietly sacrifice quality of life in retirement.
4. Sequence of Return Risk Matters More Than Average Returns
Most articles emphasize long-term average returns. Once withdrawals begin, the timing of returns matters far more than the average.
Poor market performance early in retirement — combined with withdrawals — can permanently reduce how long your money lasts.
Why this matters to you:
Without thoughtful asset positioning and withdrawal sequencing, even well-funded retirees can face unnecessary risk. This is one of the most important — and least intuitive — aspects of retirement income planning.
5. Roth Dollars Are Often Used Too Early
Because Roth withdrawals are tax-free, many retirees tap them first. In many cases, this reduces future flexibility rather than improving it.
Why this matters to you:
Roth assets can be especially valuable later in retirement — for healthcare costs, tax control, or legacy planning. Once they’re gone, that flexibility disappears. Knowing when to use Roth dollars is often more important than knowing that you can.
6. Withdrawals Don’t Exist in Isolation
401k withdrawals interact with:
- Social Security timing
- Other investment accounts
- Healthcare and Medicare planning
- Legacy and estate intentions
Treating withdrawals as a standalone decision is one of the most common — and costly — mistakes retirees make.
Why this matters to you:
Your withdrawal strategy should support the life you want after work, not just solve for cash flow in a single year. That’s difficult to see clearly without stepping back and viewing your plan as a whole.
As Sam Neff, CFP®, puts it:
“This really gives you a good opportunity to create a plan — not just for today, but for the life you’re trying to create after work.”
The Big Picture
The rules around 401k withdrawals are only the starting point. The real work is understanding how those rules intersect with your goals, your taxes, your healthcare, and your peace of mind.
That’s why many retirees find value in speaking with a fiduciary advisor — not to be sold a product, but to gain clarity before making decisions that can’t easily be undone.
Frequently Asked Questions About 401k Withdrawals
Can I withdraw from my 401k at any time after 59½?
Yes, without the early withdrawal penalty. Taxes may still apply.
Are 401k withdrawals taxed as capital gains?
No. Traditional 401k withdrawals are taxed as ordinary income.
Can I withdraw my entire 401k at once?
Yes, but it often triggers large taxes and reduces long-term flexibility.
Is it better to withdraw monthly or annually?
Scheduled withdrawals often provide smoother taxes and budgeting, but it depends on your situation.
Can I roll over my 401k and still withdraw money?
Yes. Many retirees roll into an IRA first for greater flexibility.
What happens if I withdraw early?
You’ll likely owe income tax and a 10% penalty unless an exception applies.
Do Roth 401k withdrawals count as income?
Qualified Roth withdrawals are typically tax-free, but sequencing matters.
What if I don’t need income yet?
Delaying withdrawals and planning for RMDs may improve long-term outcomes.
What happens if I miss an RMD?
Missed RMDs can result in significant IRS penalties.
Should I talk to an advisor before withdrawing?
Yes. Withdrawal decisions are often irreversible and deserve careful planning.
Before You Withdraw, Pause for a Moment
If you’re within five years of retirement — or already taking money from your 401k — the decisions you make now will echo for decades.
Taxes can’t always be undone.
Missed opportunities can’t always be recovered.
And some withdrawal mistakes are permanent.
A short conversation with a fiduciary advisor can help you:
- Reduce unnecessary taxes
- Create sustainable income
- Align withdrawals with the life you actually want after work
If you’d like clarity before making a decision, contact us to get started or enquire further.
Financial Enhancement Group is an SEC Registered Investment Advisor.
