Can You Withdraw From Your 401k While Still Working?

A 401(k) plan serves as a foundational component of many individuals’ retirement savings strategies, offering tax advantages for long-term growth. These employer-sponsored accounts are primarily designed to accumulate funds until an individual separates from service or reaches retirement age. While access to these savings is generally restricted until later in life, specific, limited circumstances permit withdrawals while still actively employed. Understanding these exceptions is important for those considering accessing their retirement funds prematurely.

General Rules and Types of In-Service Withdrawals

An “in-service withdrawal” refers to a distribution taken from a qualified employer-sponsored retirement plan, such as a 401(k), while an employee remains actively employed. Funds within a 401(k) are intended for retirement and are not accessible until specific events occur, such as severance from employment, disability, or reaching a certain age. However, exceptions allow for early access.

The primary categories of in-service access to 401(k) funds include 401(k) loans, hardship withdrawals, and in-service non-hardship distributions. A 401(k) loan involves borrowing money from one’s own account with the expectation of repayment. A hardship withdrawal is a non-repayable distribution taken due to an immediate and heavy financial need. In-service non-hardship distributions are available after a participant reaches a specific age, such as 59.5, and do not require a demonstration of financial need.

The availability of these options is not universal. Each plan document specifies whether loans, hardship withdrawals, or non-hardship distributions are permitted, along with any conditions or limitations. Participants should consult their plan administrator or review their plan’s summary plan description to determine available options.

Eligibility and Conditions for In-Service Withdrawals

Accessing funds through a 401(k) loan is permitted if the plan allows for such provisions, with limitations on the amount that can be borrowed. Federal regulations limit the maximum loan amount to the lesser of $50,000 or 50% of the participant’s vested account balance. An exception allows borrowing up to $10,000 if 50% of the vested balance is less than that amount, though plans are not required to offer this specific exception.

Loans must be repaid within a maximum of five years for general purposes, with interest. Repayment usually occurs through regular, equal payments, often via payroll deductions, to ensure timely amortization of both principal and interest. If a loan is not repaid according to its terms, the outstanding balance can be treated as a “deemed distribution,” which has tax implications.

Hardship withdrawals are permissible only when a participant demonstrates an “immediate and heavy financial need,” as defined by the Internal Revenue Service (IRS). The amount withdrawn must not exceed what is necessary to satisfy this financial need, including any amounts required to cover taxes or penalties. The IRS provides specific safe harbor reasons that qualify for a hardship withdrawal:

Expenses for medical care for the participant, their spouse, or dependents.
Costs directly related to the purchase of a principal residence, excluding mortgage payments.
Tuition, related educational fees, and room and board for the next 12 months of post-secondary education for the participant, their spouse, or dependents.
Payments necessary to prevent eviction from or foreclosure on a principal residence.
Expenses for the burial or funeral of a participant’s parent, spouse, children, or dependents.
Expenses for the repair of damage to a principal residence due to a casualty loss.

Before a hardship withdrawal is granted, the participant must confirm they have exhausted other reasonably available resources, such as plan loans, to meet the financial need. Unlike loans, hardship withdrawals are not repaid to the account.

In-service non-hardship distributions provide another avenue for accessing funds while still employed, provided the plan permits them. These distributions do not require a demonstration of immediate financial need or a specific hardship event. Such withdrawals are typically allowed once a plan participant reaches age 59.5.

While some plans may allow access to after-tax or rollover contributions at any time, distributions from elective deferrals and safe harbor contributions generally require the participant to be at least 59.5 years old. These distributions offer flexibility for participants who wish to access a portion of their retirement savings without meeting the stringent criteria of a hardship event or incurring a loan obligation. Participants should always verify the specific rules governing these distributions within their 401(k) plan document.

Tax Implications and Penalties

All distributions from a traditional 401(k) plan, including in-service withdrawals, are generally taxed as ordinary income in the year they are received. This means the withdrawn amount is added to the participant’s gross income and taxed at their marginal income tax rate. State income taxes may also apply, depending on the state’s tax laws.

A significant consideration for early withdrawals is the additional 10% early withdrawal penalty imposed by the IRS on distributions taken before age 59.5. This penalty applies on top of regular income tax. Various exceptions exist to this 10% penalty:

Distributions made due to total and permanent disability.
Payments for unreimbursed medical expenses exceeding 7.5% of the participant’s adjusted gross income.
Distributions structured as substantially equal periodic payments (SEPP) under IRS Section 72(t).
Distributions for qualified higher education expenses.
Up to $10,000 for a first-time home purchase.
Up to $5,000 for qualified birth or adoption expenses.
Distributions made to a qualified military reservist called to active duty.
Distributions resulting from an IRS levy on the plan.
If a participant separates from service during or after the year they turn age 55, withdrawals from that plan may avoid the 10% penalty.

For 401(k) loans, the borrowed amount is generally not considered a taxable distribution as long as it is repaid according to the established terms. However, if the loan defaults or is not repaid within the specified timeframe, the outstanding balance becomes a “deemed distribution.” This deemed distribution is treated as taxable income in the year of default and is typically subject to the 10% early withdrawal penalty if the participant is under age 59.5 and no other penalty exception applies. A deemed distribution is considered a taxable event, but the loan obligation itself may still remain on the plan’s books until fully repaid or offset.

Hardship withdrawals are generally taxable as ordinary income. They are also typically subject to the 10% early withdrawal penalty if the participant is under age 59.5, unless one of the specific penalty exceptions (like those for medical expenses or disability) applies. Unlike loans, hardship withdrawals cannot be repaid to the 401(k) plan.

In contrast, in-service non-hardship distributions taken by participants aged 59.5 or older are taxable as ordinary income but are not subject to the 10% early withdrawal penalty. For any taxable distribution, a mandatory 20% federal income tax withholding is generally applied if the distribution is not directly rolled over to another eligible retirement plan or IRA. This withholding is a prepayment of taxes and does not necessarily represent the total tax liability.

The Withdrawal Process

Initiating an in-service withdrawal from a 401(k) plan typically begins with contacting the plan administrator or the employer’s human resources department. These contacts can provide information regarding the specific withdrawal options available under the plan and the necessary steps to proceed. They will also confirm the applicable terms and conditions for each type of withdrawal.

Participants will generally need to complete specific forms provided by the plan administrator, which vary depending on whether it is a loan, hardship withdrawal, or non-hardship distribution. Supporting documentation is often required, such as proof of the financial need for a hardship withdrawal or identification for any distribution. The completed forms and any required documentation are then submitted through the channels specified by the plan, which may include an online portal, mail, or fax.

Once the request is submitted, the plan administrator reviews it to ensure compliance with both the specific terms of the 401(k) plan and applicable IRS regulations. This review process confirms eligibility and verifies that all necessary information has been provided. If the request is approved, the funds are then disbursed to the participant.

Disbursement methods can include direct deposit to a bank account or a physical check. The timeline for receiving funds typically ranges from a few business days to approximately two weeks following approval. For taxable distributions, mandatory 20% federal income tax withholding, usually 20% of the gross amount, will be applied by the plan administrator. Participants should also be aware that state income tax withholding may apply, depending on their state of residence.