Can I take money from my 401(k)?

401(k) withdrawal options while you’re still working

One of the primary differences between your 401(k) and your bank account is that you can’t withdraw money from your 401(k) whenever you want. You can take money out, but only under limited circumstances and if you meet certain requirements. The purpose of these rules is to help ensure that the funds you’ve earmarked for retirement will be there when you retire.

Under 401(k) rules, employers are allowed, but not required, to offer the following withdrawal options. You’ll want to check your summary plan description (SPD) or plan highlights to see which options your plan includes.   

401(k) loans

If your plan has a loan provision, you may be able to withdraw money from your 401(k) and repay it within a certain time period, usually five years. You can generally borrow the lesser of $50,000 or 50% of your vested account balance, although your employer can set lower dollar limits and other parameters. Before taking a 401(k) loan, you’ll want to weigh the potential benefits and trade-offs.

On the plus side, you can use the proceeds for whatever you want, and you don’t have to pay taxes on the money unless you don’t repay the loan. The interest rate is typically less than what you’d pay if you borrowed money from your bank, and all loan repayments are made to your retirement account.

The biggest negative is that the amount you borrow loses the potential to keep growing, which can result in lost investment earnings. Although you’re paying yourself back, it could take years to make up the potential missed earnings. You may need to increase your contributions or change your target retirement date to reach your savings goal. Additionally, you may incur loan processing and maintenance fees, which would be deducted directly from your 401(k) account.         

Hardship withdrawals

Your plan may allow you to withdraw funds if you’re experiencing an immediate and heavy financial need. What’s considered a financial hardship?

• Medical expenses for you or your dependents
• The purchase of your primary residence
• College tuition, education fees, and room and board expenses for the next 12 months for you or your dependents
• Payments needed to avoid eviction from or foreclosure on your primary residence
• Funeral expenses for you or your dependents
• Certain costs to repair damage to your primary residence that would qualify for a casualty deduction under the Internal Revenue Code
• Expenses and losses to your principal residence caused by a federally declared disaster   

If you qualify for a hardship withdrawal, you can only take out the amount you need to cover the expense, nothing more. While you won’t have to pay the money back, you’ll have to pay federal incomes taxes on it. You may also have to pay a 10% early withdrawal penalty if you’re under age 59½, unless you qualify for an exception. We’ll discuss these exceptions in a later section.

Given the potential tax consequences and the impact on retirement savings, many people only consider hardship withdrawals after exhausting all their other options. 

In-service withdrawals

Your employer may allow you to take money out while you’re still working, if you meet certain age or service requirements. For example, withdrawals may be allowed for employees who are age 59½ or older. These types of distributions are known as in-service withdrawals. Your employer can impose additional restrictions, such as limiting how much you can take or which contributions you can touch—pretax, Roth, after tax, or employer match. All of the parameters should be outlined in your SPD. 

Similar to hardship withdrawals, you may have to pay federal income taxes on the amount you receive, and a 10% early withdrawal penalty may apply if you’re under age 59½ unless you qualify for an exception.

Before taking an in-service withdrawal, you should consider the reason for the distribution and the effect it could have on your taxes and 401(k) account. There may be a better way to achieve your goal while keeping your savings intact. 

Withdrawals exempt from the early withdrawal penalty 

The IRS waives the 10% tax penalty for certain types of 401(k) withdrawals, including:

• Death or total and permanent disability
• Unreimbursed medical expenses that exceed a certain percentage of your adjusted gross income
• A series of substantially equal payments after you separate from service

As you can see, the rules for taking a 401(k) withdrawal while you’re working can be quite complex. So, you may want to consult with a financial professional or tax advisor. They can help you understand your options, navigate the rules, and determine the best approach based on your unique circumstances.

Now, let’s look at the options that are available if you leave your job.  

401(k) withdrawal options when you change jobs

You can generally do one of four things with your 401(k) account when you leave your employer. The types of investments and services you want and the potential impact on your retirement savings and taxes may influence which one you choose. 

1 Keep your money where it is—If you’re happy with the plan’s investments and the employer allows it, you might decide to leave the money in your existing 401(k) account. This decision requires little action on your part, and you can continue to defer taxes on your savings. The potential downside is that you won’t be able to make any additional contributions to your account. 

2 Roll your money to your new employer’s 401(k)—If your new employer allows it, you might consider rolling your old 401(k) into their plan. This is another way to continue to defer taxes on your savings. Additionally, having all your 401(k) money in one place can make it easier to track progress on your retirement goals. The potential downside is that the new plan may not offer all the investments or services you want.  

3 Roll your money to an IRA—If you want more control over your account and investment flexibility, you might decide to roll your money to an IRA, which can offer similar tax benefits as a 401(k). With an IRA, you can invest wherever you want; you’re not limited to a predetermined list of investments chosen by your employer. The potential downsides are that you may not have access to the same services you had in the plan, and you may pay higher investment and trustee fees.   

4 Take the cash—As tempting as this may sound, this option should be last on your list, unless you need money to cover financial necessities or a financial emergency. Any money you receive may be subject to federal income taxes and a 10% early withdrawal penalty if you’re under age 59½. Plus, it can have a significant impact on your future financial security. Spending your savings today means you’ll have less when you retire.

You may want to consult a financial professional or tax advisor to help you fully understand these options and to pick the one that aligns best with your financial needs and goals. Keep in mind that there are advantages and disadvantages to all distribution options, and you're encouraged to review them to determine if staying in your retirement plan, rolling over to an IRA, or another option is best for you.

Don’t shortchange your future self

Your 401(k) is one of the easiest and most convenient ways to save for retirement, but it can be scary to put money away for an event that’s 10, 20, or 30 years down the road. The 401(k) withdrawal options we discussed are designed to help ease these fears; however, just because you can take money out of your 401(k) doesn’t mean you should. Remember, your 401(k) isn’t a bank account; it’s an account for the future you’re dreaming about.