How to Take Money out of a 401(K) Plan

Avoid Costly 401(k) Plan Mistakes

In an ideal world, everybody would leave their 401(k) funds alone until they need the money for retirement. That might mean rolling your account over to an Individual Retirement Account (IRA) but it also means not cashing out the funds prior to reaching retirement age.

This would allow the money to grow to its maximum potential amount. In investing, time truly is your best asset. At some point though, you will begin taking distributions, and here's what you need to know.

The best way to take money out of your 401(k) plan depends on three things:

  • Your age
  • Whether you still work for the company that sponsors your 401(k) plan
  • Your 401(k) plan’s rules
© The Balance, 2018

Take Money out of a 401(K) Plan Once You Leave Your Job

If you no longer work for the company that sponsored your 401(k) plan, first contact your 401(k) plan administrator or call the number on your 401(k) plan statement. Ask them how to take money out of the plan.

Since you no longer work there, you cannot borrow your money in the form of a 401(k) loan or take a hardship withdrawal. You must either take a distribution or roll over your 401(k) to an IRA.

Any money you take out of your 401(k) plan will fall into one of the following three categories, each with different tax rules:

  • Regular 401(k) withdrawal: This applies if you no longer work for the employer that sponsored the 401(k) plan, and you are over age 59 ½, (​in some cases you only need to be over age 55, as long as you were 55 or older at the point you retired from that employer). With a regular 401(k) withdrawal you will pay income tax on the amount you take out, but no penalty tax will apply because of your age.
  • Early 401(k) distribution: This applies if you are not yet age 59 ½ or don’t qualify for the age 55 regular withdrawal, and you're no longer working for the employer that sponsored the 401(k) plan. You will pay income taxes and a 10 percent penalty tax when you take money out of your 401(k) plan as an early distribution. If you need to cash out your 401(k) plan early due to debt or other financial hardship issues, think twice, because your 401(k) assets are protected from creditors, even in Chapter 7 bankruptcy.
  • 401(k) Rollover to IRA: You can do a rollover of your 401(k) account balance to an IRA at a company of your choice. You pay no taxes if you do a rollover to an IRA, and your money can stay in your IRA for your later use. Then you can withdraw amounts from your IRA only as you need it. You only pay taxes on the amount you withdraw each year. With the IRA, you will also have the option of using a special rule called 72(t) payments which allow you to take money out, and also avoid the early withdrawal penalty tax.

    Take Cash out When You Are Still Employed

    Some 401(k) plans do not allow you to take money out of the plan while you still work for your employer. Other plans offer a few choices such as a 401(k) loan, hardship withdrawal, or in-service distribution.

    • 401(k) Loan: Many 401(k) plans allow you to take money out of the plan through a 401(k) loan in which you borrow against your account balance. The maximum amount of the loan allowed is usually the lesser of $50,000, or half of your vested 401(k) account balance. You will be charged interest, and while the money is out of the account it's not earning income so use this option only in emergencies.
    • 401(k) Hardship Withdrawal: Some but not all 401(k) plans allow you to take a hardship withdrawal if your circumstances qualify under the hardship provisions.
    • In-Service Distribution: A few 401(k) plans allow you to take money out of the plan while you are still employed by using something called an “in-service distribution.”

    In all the above cases, check with your 401(k) plan administrator or call the number on your 401(k) plan statement to see if they allow these options.

    What If You Are the Beneficiary of a 401(K) Plan?

    If you are the beneficiary of a 401(k) plan, you'll have a little bit different rules that apply to taking money out of the 401(k) plan. Your choices will depend on whether you were the spouse of the 401(k) plan participant or a non-spouse, and whether the 401(k) plan participant was age 70 ½ or not.