How much you can take out depends on the account type, your age, and whether you've retired
The account that lets you withdraw the most money is not the same as the account that holds the most money. A 401(k) or 403(b) can grow larger than an IRA because contribution limits are higher, but the rules about when and how much you can withdraw are different for each type. A Roth IRA lets you withdraw your contributions anytime without penalty, while a traditional IRA charges a 10% penalty on earnings withdrawn before age 59½. A SEP IRA or Solo 401(k) for self-employed people can accept much larger annual contributions than a regular IRA, which means the account can grow larger and you can eventually withdraw more.
If you are under 59½ and still working, your withdrawal options are limited by penalty rules, not by how much is in the account. If you have retired or separated from service, the rules change. The highest payment you can actually take depends on whether you need the money now, whether you can afford the tax hit, and what type of account holds it.
Key Takeaways
- A 401(k) or 403(b) can hold more total money than an IRA because annual contribution limits are higher, which means larger withdrawals are possible in retirement.
- Withdrawals before age 59½ from traditional IRAs and 401(k)s trigger a 10% penalty on earnings, but Roth IRA contributions can be withdrawn anytime without penalty.
- Self-employed people using a Solo 401(k) or SEP IRA can contribute far more per year than employees in a regular 401(k), allowing the account to grow larger.
- Required Minimum Distributions (RMDs) begin at age 73 for most accounts, which sets a floor on how much you must withdraw each year regardless of your needs.
401(k) and 403(b) plans allow the highest annual contributions
If you work for a company or nonprofit, a 401(k) (for-profit employers) or 403(b) (nonprofits and schools) lets you contribute more per year than an IRA. For 2024, you can contribute up to $23,500 of your own salary to a 401(k) or 403(b), plus an additional $7,500 if you are age 50 or older. Your employer may also contribute, which increases the total in the account without counting against your limit.
Because these accounts can accept larger contributions year after year, they often grow to larger balances than IRAs. Once you retire or leave the job, you can withdraw the full balance, though withdrawals before age 59½ are subject to a 10% penalty on earnings (contributions you made yourself are not penalized). At age 73, you must begin taking Required Minimum Distributions (RMDs), which means the IRS requires you to withdraw a percentage of the balance each year based on your age and life expectancy.
If you leave your job before retirement, you can roll a 401(k) or 403(b) into an IRA to keep it invested and delay withdrawals, or you can take a lump sum distribution and pay income tax on the full amount when ready.
SEP IRAs and Solo 401(k)s for self-employed people accept much larger contributions
If you are self-employed or own a small business, a SEP IRA or Solo 401(k) lets you set aside far more money than a regular IRA. A SEP IRA allows you to contribute up to 25% of your net self-employment income, with a maximum of $69,000 per year (2024). A Solo 401(k) (also called a self-employed 401(k)) lets you contribute both as an employee and as an employer, with a combined limit of $69,000 per year, plus an additional $7,500 if you are age 50 or older.
Because these accounts accept larger annual contributions, they can grow to much larger balances than a standard IRA, which caps contributions at $7,000 per year ($8,000 if age 50 or older). Once you reach retirement age, the larger balance means you can withdraw more money. Like a traditional 401(k), withdrawals before age 59½ trigger a 10% penalty on earnings, and RMDs begin at age 73.
A Solo 401(k) offers one additional advantage: you can borrow against the balance while you are still working, up to 50% of the vested balance or $50,000, whichever is less. A SEP IRA does not allow loans.
Roth accounts let you withdraw contributions anytime without penalty
A Roth IRA or Roth 401(k) works differently from traditional accounts because contributions are made with after-tax dollars. This means you can withdraw the contributions themselves anytime, at any age, without penalty or tax. You can only withdraw earnings (the investment gains) penalty-free after age 59½ and if the account has been open for at least five years.
A Roth IRA has lower annual contribution limits than a 401(k) — $7,000 per year ($8,000 if age 50 or older in 2024) — so the account typically grows more slowly. However, because you can access your contributions without penalty, a Roth IRA offers more flexibility if you need money before retirement. A Roth 401(k), offered by some employers, accepts the same contribution limits as a traditional 401(k) ($23,500 in 2024), so it can grow larger while still allowing penalty-free access to contributions.
Roth accounts do not require RMDs during your lifetime, which means you can leave the money invested as long as you want. Your beneficiaries will inherit the account, though they must withdraw it within ten years under current rules.
Early withdrawal penalties reduce the amount you actually receive
If you withdraw money from a traditional IRA, 401(k), or 403(b) before age 59½, the IRS charges a 10% penalty on the earnings portion of the withdrawal. You also owe income tax on the earnings. This means if you have a $100,000 balance and $30,000 of it is earnings, withdrawing the full amount before age 59½ costs you $3,000 in penalty plus income tax on the $30,000, which could be another $7,500 to $12,000 depending on your tax bracket.
Some exceptions exist: you can withdraw without penalty if you are permanently disabled, if you are paying for unreimbursed medical expenses above 7.5% of your adjusted gross income, or if you are a first-time homebuyer (up to $10,000 lifetime from an IRA only). A 401(k) may allow a "hardship withdrawal" for when ready financial need, though the rules vary by plan and you still owe income tax.
A Roth IRA avoids this problem for contributions because they are not penalized. A Roth 401(k) does not allow penalty-free access to contributions before age 59½ unless you roll it into a Roth IRA first, which requires a separate step.
Required Minimum Distributions set a floor on annual withdrawals
Starting at age 73, the IRS requires you to withdraw a minimum amount from traditional IRAs, 401(k)s, 403(b)s, and SEP IRAs each year. The amount is calculated by dividing your account balance on December 31 of the prior year by a life expectancy factor published by the IRS. For someone age 73, the factor is roughly 26.5, so a $500,000 balance would require a withdrawal of about $18,868 that year.
If you do not take the RMD, the IRS charges a 25% penalty on the amount you failed to withdraw (reduced to 10% if you correct it within two years). This penalty applies even if you do not need the money and do not want to withdraw it. Roth IRAs are exempt from RMDs during the account holder's lifetime, which is one reason they are useful for people who want to leave money invested longer.
If you are still working at age 73 and do not own more than 5% of the company, you may be able to delay RMDs from your current employer's 401(k) until you retire, though this does not explore to IRAs or to 401(k)s from previous employers.
Comparing total withdrawal potential across account types
| Account Type | 2024 Annual Contribution Limit | Withdrawal Before 59½ | RMD Required at 73 |
|---|---|---|---|
| Traditional IRA | $7,000 ($8,000 at 50+) | 10% penalty on earnings | Yes |
| Roth IRA | $7,000 ($8,000 at 50+) | Contributions penalty-free; earnings penalized | No |
| 401(k) or 403(b) | $23,500 ($30,500 at 50+) | 10% penalty on earnings | Yes |
| Roth 401(k) | $23,500 ($30,500 at 50+) | Contributions penalized; earnings penalized | No |
| SEP IRA | Up to 25% of net self-employment income; max $69,000 | 10% penalty on earnings | Yes |
| Solo 401(k) | Up to $69,000 ($76,500 at 50+) | 10% penalty on earnings | Yes |
Frequently Asked Questions
Can I withdraw my entire 401(k) balance at once when I retire?
Yes, you can take a lump sum distribution of the entire balance once you retire or leave the job. You will owe income tax on the full amount, which could push you into a higher tax bracket that year. Many people roll the balance into an IRA instead to spread withdrawals over time and manage their tax bill.
What happens if I need money from my retirement account before age 59½?
You can withdraw from a Roth IRA without penalty as long as you withdraw only your contributions, not earnings. For traditional IRAs and 401(k)s, you face a 10% penalty plus income tax on earnings. Some plans allow hardship withdrawals or loans, though rules vary. A few exceptions to the penalty exist, such as disability or first-time homebuyer status (IRA only, up to $10,000).
Do I have to take money out of my retirement account every year?
Not until age 73, when RMDs begin for most accounts. Roth IRAs do not require withdrawals during your lifetime. If you do not need the money, you can leave it invested, but once RMDs start, you must withdraw the calculated amount each year or face a 25% penalty on the shortfall.
Which account type grows the largest balance?
A Solo 401(k) or SEP IRA for self-employed people typically grows the largest because they accept the highest annual contributions — up to $69,000 per year. For employees, a 401(k) or 403(b) grows larger than an IRA because the contribution limit is $23,500 per year versus $7,000 for an IRA.
Can I access my Roth 401(k) contributions without penalty before retirement?
Not directly from the Roth 401(k) itself. However, you can roll the Roth 401(k) into a Roth IRA, wait five days, and then withdraw contributions penalty-free. This requires an extra step that a Roth IRA does not need.