How to Get Money Out of Your 401k Before Retirement

The basic ways to access your 401k money

You can take money out of your 401k in three main ways: a loan from your plan, a withdrawal while you still work, or a distribution after you leave your job. Each one has different rules about how much you can take, what happens to your taxes, and whether you pay a penalty. The route available to you depends on your plan's rules, your age, and whether you have a financial hardship.

Most 401k plans allow loans, but not all allow in-service withdrawals. Your plan documents spell out what is permitted. You can find these documents by asking your plan administrator — usually the human resources or benefits department at your company — or checking your plan's website if it has one.

Key Takeaways

• A 401k loan lets you borrow from your own balance and repay it through payroll deductions, with no tax hit if you repay on time.
• In-service withdrawals while still employed are allowed by some plans for people age 59½ or older, or for those with a financial hardship your plan recognizes.
• Withdrawals before age 59½ usually trigger a 10 percent penalty plus income tax, unless you may have access to for an exception like disability or substantial equal periodic payments.
• Once you leave your job, you can roll your 401k into an IRA or another employer plan, take a lump-sum distribution, or leave it with your former employer if the balance is large enough.
• Your plan administrator can tell you which access methods your specific plan allows and what paperwork you need to submit.

Taking a loan from your 401k

A 401k loan is money you borrow from your own account balance and repay through payroll deductions. The IRS allows you to borrow up to 50 percent of your vested balance, or $50,000, whichever is less. You repay the loan with interest — the rate is set by your plan, usually the prime rate plus 1 or 2 percent — and the interest goes back into your account.

The main advantage is that you owe no income tax on the amount you borrow, and there is no 10 percent early withdrawal penalty. If you repay the loan on schedule, the transaction has no tax consequence at all. The catch is that if you leave your job before the loan is repaid, most plans require you to pay back the full remaining balance within 60 days or it becomes a taxable withdrawal subject to the early withdrawal penalty.

To take a loan, contact your plan administrator and ask for the loan process. You will need to specify how much you want to borrow and over how many years you want to repay it. Most plans process loans within one to two weeks. Your plan will deduct the loan payment from your paycheck automatically.

In-service withdrawals for people 59½ and older

If you are age 59½ or older and still working, many plans allow you to withdraw money from your 401k without penalty. This is called an in-service withdrawal. You owe income tax on the amount you withdraw, but you do not owe the 10 percent early withdrawal penalty because you have reached the age threshold.

Not all plans permit this. Some plans only allow in-service withdrawals for people age 62 or older, or only from certain portions of your account. Check your plan documents or ask your plan administrator which in-service withdrawal options are available to you. If your plan does allow it, you can usually request a withdrawal through the same process as a loan — contact the plan administrator, fill out a form, and the money is sent to you or deposited into a bank account you specify.

Hardship withdrawals while still employed

If you face a financial hardship, some plans allow you to withdraw money before age 59½ without the 10 percent penalty. The IRS defines hardship narrowly: medical expenses, home purchase, education costs, preventing eviction or foreclosure, burial or funeral expenses, or expenses to repair damage to your home. Your plan may have its own definition that is stricter or slightly different.

You must prove the hardship to your plan administrator. This usually means submitting documents like medical bills, a mortgage statement, a tuition bill, or an eviction notice. You can withdraw only the amount needed to cover the hardship and related taxes. You still owe income tax on the withdrawal, but the 10 percent penalty is waived if your plan recognizes your situation as a hardship.

Hardship withdrawals are slow — approval can take three to six weeks — and some plans require you to exhaust other options like loans before approving a hardship withdrawal. Ask your plan administrator what hardships your plan recognizes and what documents you need to submit.

Distributions after you leave your job

Once you separate from your employer, you have several options for your 401k balance. You can leave it with your former employer if the balance is at least $5,000 (some plans have different minimums). You can roll it into an IRA at a bank or brokerage. You can roll it into a new employer's 401k plan if that plan accepts rollovers. Or you can take a lump-sum distribution and receive the full balance as a check.

If you take a lump-sum distribution before age 59½, you owe income tax on the full amount plus a 10 percent early withdrawal penalty, unless you may have access to for an exception. The most common exception is a direct rollover to an IRA or another 401k — if you do this, there is no tax or penalty. An indirect rollover, where the plan sends you a check and you deposit it into an IRA within 60 days, triggers a 20 percent withholding tax, though you can reclaim it when you file your tax return if you complete the rollover on time.

If you are age 55 or older and separated from service, you can withdraw from your 401k without the 10 percent penalty, though you still owe income tax. This is called the Rule of 55. If you are younger than 55, you can avoid the penalty by setting up substantially equal periodic payments (SEPP) — a series of equal withdrawals calculated using IRS life expectancy tables — but this locks you into a schedule for at least five years or until age 59½, whichever is longer.

What happens to your taxes

Any 401k withdrawal that is not a direct rollover is subject to income tax. The amount you withdraw is added to your income for the year, and you owe tax at your regular income tax rate. If you withdraw $10,000 and you are in the 22 percent tax bracket, you owe roughly $2,200 in federal income tax on that withdrawal.

If you withdraw before age 59½ and do not may have access to for an exception, you also owe a 10 percent penalty on top of the income tax. That same $10,000 withdrawal would cost you $1,000 in penalty plus $2,200 in tax, leaving you with $6,800. Some states also tax 401k withdrawals, so your total tax bill may be higher.

Your plan will withhold taxes from the distribution automatically — usually 20 percent for a lump-sum distribution — but this withholding may not cover your full tax bill. When you file your tax return, you will owe any additional tax owed, or you may receive a refund if too much was withheld.

Roth 401k withdrawals

If your 401k plan includes a Roth option and you have contributed to it, the rules are slightly different. Roth contributions are made with after-tax money, so you do not owe income tax on the contributions themselves when you withdraw them. You do owe tax on the earnings (the investment gains) if you withdraw before age 59½ and before the account has been open for five years.

The five-year rule is separate from the age rule. Even if you are 59½ or older, if your Roth 401k has been open for less than five years, you owe tax on the earnings portion of your withdrawal. Once the account has been open for five years and you are 59½ or older, you can withdraw both contributions and earnings tax-free.

Frequently Asked Questions

Can I withdraw from my 401k if I am still working?

Yes, if your plan allows it. You can take a loan from your 401k at any age. If you are 59½ or older, many plans allow in-service withdrawals. If you have a financial hardship your plan recognizes, you may be able to withdraw without the early withdrawal penalty. Ask your plan administrator which options your plan permits.

What is the difference between a loan and a withdrawal?

A loan is money you borrow and repay through payroll deductions. You owe no tax or penalty if you repay on schedule. A withdrawal is money you keep. You owe income tax on it, and if you are under 59½ and do not may have access to for an exception, you also owe a 10 percent penalty. A withdrawal reduces your account balance permanently; a loan does not.

What happens to my 401k loan if I get fired or quit?

Most plans require you to repay the full remaining balance within 60 days. If you do not, the unpaid balance is treated as a taxable withdrawal. You owe income tax on it, and if you are under 59½, you also owe the 10 percent early withdrawal penalty. Some plans allow you to continue making loan payments after you leave, but this is rare — ask your plan administrator before you leave your job.

Do I have to pay taxes on a 401k rollover?

No, if it is a direct rollover. The plan sends the money directly to your IRA or new employer's plan, and there is no tax or penalty. If you take an indirect rollover — the plan sends you a check — 20 percent is withheld for taxes. You have 60 days to deposit the full amount into an IRA to avoid tax on the entire withdrawal. If you do not complete the rollover in time, you owe tax and penalty on the full amount.

Can I withdraw my 401k if I am disabled?

Yes. If you are permanently and totally disabled as defined by the IRS, you can withdraw from your 401k before age 59½ without the 10 percent penalty. You still owe income tax on the withdrawal. You will need to provide documentation of your disability to your plan administrator. The definition is strict — you must be unable to engage in any substantial gainful activity due to a physical or mental condition.