Can I Close a 401(k) While Still Employed?

A 401(k) plan is a tax-advantaged savings vehicle designed for retirement. While many wonder if they can access these savings while still employed by the sponsoring company, fully withdrawing or “closing” a 401(k) is generally not permitted. These accounts are intended for long-term savings. However, specific, limited circumstances allow accessing a portion of these funds, as detailed by plan rules and federal regulations.

General Rules for 401(k) Access While Employed

Workplace retirement plans, such as 401(k)s, are established to provide financial security during retirement. Access to these funds is restricted until a “distributable event” occurs. Common events include termination of employment, reaching a specific age, or experiencing a qualifying disability.

Plan documents dictate the rules for accessing funds, and employers are not obligated to offer early withdrawal options. Your contributions are always yours. However, employer contributions become accessible only after a vesting schedule is met, which outlines how much of the employer’s contributions become fully owned by the employee over time.

Permitted In-Service Distribution Scenarios

While full withdrawal is uncommon, certain limited situations allow you to access 401(k) funds while still employed, often termed “in-service distributions.” One common scenario is reaching age 59½, which allows penalty-free withdrawals from most plans, even if you continue working. These distributions are permitted for elective deferrals and safe harbor contributions.

Another possibility is a hardship withdrawal, which addresses an “immediate and heavy financial need” as defined by the IRS. Qualifying reasons include significant medical expenses, costs related to purchasing or preventing eviction/foreclosure on a primary residence, tuition fees, or funeral expenses. These withdrawals are subject to criteria and require demonstrating that the need cannot be met through other financial resources.

Some plans permit participants to borrow from their 401(k), which is a temporary loan. You can borrow up to 50% of your vested account balance, with a maximum of $50,000, and must repay it within five years, or longer if used for a primary residence. If your employer terminates the entire 401(k) plan, funds may become available for distribution or rollover, even if you remain employed. Some plans also allow in-service rollovers, enabling you to transfer vested funds to an Individual Retirement Account (IRA) while still working, potentially offering more investment choices.

Tax Consequences of Early Withdrawals

Accessing 401(k) funds before reaching age 59½ incurs tax implications designed to discourage early use of retirement savings. Any pre-tax withdrawals are subject to ordinary income tax at your federal and, if applicable, state income tax rates. This can push you into a higher tax bracket for the year of the withdrawal.

Beyond regular income tax, a 10% additional tax penalty applies to withdrawals made before age 59½. Exceptions exist, including withdrawals due to total and permanent disability, unreimbursed medical expenses exceeding 7.5% of your adjusted gross income, or qualified distributions for birth or adoption expenses (up to $5,000 per child). If employment ends in the year you turn 55 or later, withdrawals from that specific plan may also be exempt from the 10% penalty.

A mandatory 20% federal income tax withholding is applied to eligible rollover distributions paid directly to you, even if you plan to roll over the funds. This means you receive only 80% of the distribution. You would need to add funds from other sources to complete a full rollover and avoid remaining tax and potential penalties. Taking early withdrawals also reduces your retirement nest egg, sacrificing potential investment growth over many years.

Steps to Request a Distribution

If you believe you qualify for an in-service distribution, the first step is consulting your plan administrator or human resources department. They can provide details about your employer’s 401(k) plan rules and confirm which types of distributions are available. Understanding your plan’s unique provisions is important, as not all plans offer every type of early access.

You will need to gather necessary documentation to support your request, such as medical bills for a hardship withdrawal or proof of age for an age-based distribution. Obtain the official distribution request forms from your plan administrator or provider. These forms require you to specify the reason for the withdrawal, the amount requested, and your tax withholding preferences.

After completing the forms and attaching supporting documents, submit them according to your plan’s instructions, which may include mailing or using an online portal. Processing times can vary, from a few days to several weeks. You will receive communications from the plan administrator regarding the status of your request and the eventual disbursement of funds.