Account holders can withdraw money from 401k plans when they reach age 59.5 years, retire early, become disabled, die or have qualifying financial hardships, states the IRS. Participants must begin distributions by age 70.5 or face penalties, unless they are employed by a company they do not own.
All 401k withdrawals are subject to regular income tax payments, but when account holders become 59.5 years old, they can initiate regular distributions from their 401k funds without paying 10 percent penalty taxes, says the IRS. If participants retire before the age of 59.5, they can withdraw funds without penalties if they participate in a substantially equal periodic payment plan. The payment plan must be effective for at least five years, even if the account holder reaches 59.5 before it terminates, reports Bankrate.
Account holders can begin withdrawing funds from 401k accounts without penalty if they become completely and permanently disabled, according to the IRS. If participants die, their beneficiaries can make penalty-free withdrawals. Distributions for other financial hardships are only allowed if all other resources are exhausted. Allowed withdrawals that are exceptions to the 10 percent penalty tax rule include payments for medical bills that exceed 10 percent of a participant's adjusted gross income, health insurance premiums while the participant is unemployed and outstanding debts to the IRS, reports Bankrate. Permissible withdrawals with payment of the 10 percent penalty include the down payment on a first-time home purchase and higher education costs for the participant and family.