Can You Withdraw From 401k While Still Working?

A 401(k) plan serves as a tax-advantaged retirement savings vehicle, allowing employees to contribute a portion of their pre-tax or after-tax income. Funds are typically accessed in retirement. However, individuals may need to access 401(k) funds while still employed. Access is possible but subject to specific regulations and plan provisions, which can vary considerably.

When You Can Access Your 401(k) While Working

Accessing 401(k) funds while employed is an “in-service distribution” and not all plans permit it. The ability to take a distribution depends on your employer’s 401(k) plan. Employers have discretion in determining whether to allow in-service withdrawals and under what conditions. Consult your plan administrator or Summary Plan Description (SPD) for specific rules.

One condition for penalty-free in-service access is reaching age 59½. Many plans permit participants who are still working to take distributions from their 401(k) without incurring the early withdrawal penalty. This age-based rule applies to elective deferrals, qualified nonelective contributions, and qualified matching contributions, if the plan allows. Some plans permit withdrawals of after-tax or rollover contributions at any age, though penalties may apply if taken before age 59½.

Other events, such as total and permanent disability, can also trigger in-service access. For those under age 59½, loans or hardship withdrawals are common ways to access funds.

Understanding 401(k) Loans

A 401(k) loan allows access to funds without a taxable distribution, if rules are followed. You are essentially borrowing from your vested account balance. The IRS and DOL set borrowing limits. You can borrow up to 50% of your vested account balance, to a maximum of $50,000. Some plans allow borrowing up to $10,000 if 50% of your balance is less than that.

Loans must be repaid within five years, with payments made at least quarterly. An exception allows up to 15 years for a primary residence purchase. Interest is paid back into your account. Repayments are typically made through after-tax payroll deductions.

Failure to repay a 401(k) loan results in the outstanding balance being treated as a “deemed distribution.” It becomes immediately taxable as ordinary income and may incur a 10% early withdrawal penalty if you are under age 59½. If you leave employment before repayment, many plans require the balance to be repaid by your next federal tax return’s due date. Otherwise, it becomes a taxable distribution with potential penalties.

Hardship Withdrawals and Other In-Service Distributions

Hardship withdrawals allow access to 401(k) funds while employed. They are distributions, not loans, and follow IRS rules. To qualify, you must have an “immediate and heavy financial need” that cannot be met otherwise. The IRS defines specific circumstances that may qualify as a hardship:
Medical expenses for you, your spouse, or dependents.
Costs related to buying your principal residence (excluding mortgage payments).
Payments necessary to prevent eviction or foreclosure on your principal residence.
Burial or funeral expenses.
Expenses for the repair of damage to your principal residence due to a casualty loss.
Tuition and related educational expenses for postsecondary education.

The withdrawal amount cannot exceed the immediate financial need, including taxes on the distribution. Plan administrators may require documentation. Hardship withdrawals are taxable and may incur a 10% early withdrawal penalty if you are under age 59½. Recent changes allow participants to resume saving sooner after a hardship withdrawal, eliminating a prior suspension requirement.

Some plans offer other limited in-service distribution options. These include distributions of after-tax or rollover contributions at any time. Some plans permit distributions after a specified number of years of participation, regardless of age or hardship. These options are plan-specific and less common than age-based or hardship distributions.

Tax Consequences and Penalties

Accessing 401(k) funds while working often triggers tax consequences. Most traditional 401(k) distributions are ordinary income, subject to federal and state income taxes.

Distributions before age 59½ also incur a 10% early withdrawal penalty. However, exceptions can waive this penalty, even if you are under age 59½:
Total and permanent disability.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Qualified higher education expenses.
Certain distributions for a first-time home purchase (up to $10,000).
Qualified reservist distributions.
Substantially equal periodic payments (SEPP).
Qualified birth or adoption expenses (up to $5,000 per child).
Certain emergency personal expenses (up to $1,000 per year).

Plan administrators must withhold 20% of taxable distributions for federal income taxes. This mandatory withholding applies even if you intend to roll over funds. If withholding is insufficient, you may owe more taxes; if excessive, you may receive a refund.