How Can I Take Money Out of My 401(k) Without Quitting My Job?

A 401(k) is meant for retirement savings, but there are ways to access funds while still employed. Whether for an emergency or a major expense, withdrawals come with restrictions and potential penalties. Understanding these options can help you make informed decisions without jeopardizing long-term savings.

Several methods allow withdrawals without leaving your job, each with different rules, tax implications, and costs. Knowing what applies to your situation is essential before proceeding.

In-Service Distributions

Some 401(k) plans permit in-service distributions, allowing withdrawals while still employed. However, eligibility depends on the employer’s plan rules. Typically, only certain funds—such as rollover contributions or employer matching contributions—can be withdrawn, not the employee’s elective deferrals.

Age is a key factor. Many plans allow penalty-free in-service distributions only for employees 59½ or older, in line with IRS rules. Withdrawals before this age may incur a 10% early withdrawal penalty unless an exception applies. Additionally, pre-tax withdrawals are taxed as ordinary income.

Plan administrators may impose restrictions, such as limiting the number of withdrawals per year or requiring a minimum amount. Some plans mandate that funds be rolled over into an IRA or another retirement account rather than taken as cash. Reviewing your Summary Plan Description (SPD) or consulting the plan administrator can clarify specific terms.

Loans

Borrowing from a 401(k) provides access to funds without immediate taxes or penalties. Many employer-sponsored plans allow loans, with terms varying by plan. The IRS permits borrowing up to 50% of the vested account balance, with a maximum of $50,000. If the balance is below $10,000, some plans allow borrowing the full amount.

Repayment is typically required within five years through payroll deductions. Interest paid on the loan goes back into the borrower’s retirement account rather than to a lender. The interest rate is generally the prime rate plus 1%, though specific terms differ by plan. While this keeps money within the account, it does not replace lost investment growth.

If employment ends before the loan is repaid, the outstanding balance must usually be repaid by the tax filing deadline of the following year. Otherwise, it is treated as a taxable distribution, subject to income taxes and, if under 59½, a 10% early withdrawal penalty.

Hardship Withdrawals

Hardship withdrawals allow access to 401(k) funds for an immediate financial need. Unlike loans, they do not require repayment but must meet strict IRS criteria. The amount withdrawn cannot exceed the financial need.

Qualifying expenses include medical bills, funeral costs, tuition to prevent educational disruption, and payments necessary to avoid eviction or foreclosure. Employers determine eligibility and may require documentation. Some plans restrict hardship withdrawals to employee contributions, excluding employer matching funds.

The SECURE 2.0 Act has made hardship withdrawals more accessible by allowing self-certification in some cases, reducing administrative burdens. However, withdrawn funds no longer benefit from investment growth. The amount withdrawn is taxed as ordinary income and, unless an exception applies, may be subject to a 10% early withdrawal penalty.

Potential Early Withdrawal Penalties

Withdrawing from a 401(k) before age 59½ can result in a 10% early withdrawal penalty in addition to income taxes. For example, a $20,000 withdrawal could incur a $2,000 penalty, plus federal and state income taxes.

Certain exceptions allow penalty-free withdrawals, including those due to total and permanent disability, unreimbursed medical expenses exceeding 7.5% of adjusted gross income, and qualified reservist distributions for active military members. The Rule of 55 permits penalty-free withdrawals for employees who leave their job in or after the year they turn 55. Proper documentation is required to qualify for these exceptions.