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

Avoid costly mistakes when taking money out of your 401(k) plan

Planning a Personal Budget
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The best way to take money out of your 401(k) plan will depend on three things:

  • Your age
  • Whether you are still working for the company that sponsors your 401(k) plan
  • Your 401(k) plan’s rules

How to Take Money out of a 401(K) Plan When You Are No Longer Employed

If you are no longer employed by the company that sponsored your 401(k) plan, the first thing to do is contact your 401(k) plan administrator, or call the number on your 401(k) plan statement, and ask them for the paperwork you will need to take money out of the plan.

Since you are no longer employed there, you cannot borrow money in the form of a 401(k) loan, or take a hardship withdrawal. You must either take a distribution or rollover 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 are no longer working 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. 
  • 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 are no longer working for the employer that sponsored the 401(k) plan. You will pay income taxes and a 10% penalty tax when you take money out of your 401(k) plan as an early distribution. If you are cashing out of your 401(k) plan early due to creditor or debt issues, think twice. Your 401(k) assets are protected from creditors. 
  • 401(k) Rollover to IRA – you can rollover your 401(k) account balance to an IRA account at a company of your choice. You pay no taxes if you do a rollover to an IRA account, and your money can stay in your IRA account for your later use. Then you can withdraw amounts from your IRA only as you need it, so you will only pay taxes on what 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 avoid the early withdrawal penalty tax.

    How to Take Money out of a 401(K) Plan When You Are Still Employed

    Some 401(k) plans do not allow you to take money out of the plan while you are still employed there. 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. Not all 401(k) plans allow for loans. You will need to check with your 401(k) plan administrator or call the number on your 401(k) plan statement to see if they allow this.
    • 401(k) Hardship Withdrawal – some 401(k) plans allow you to take a hardship withdrawal if your circumstances qualify under the hardship provisions. Not all 401(k) plans allow this option either. You will need to check with your 401(k) plan administrator or call the number on your 401(k) plan statement to see if they allow this.
    • 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.” Not all 401(k) plans allow this option. You will need to check with your 401(k) plan administrator or call the number on your 401(k) plan statement to see if they allow this.

      How to Take Money out If You Are the Beneficiary of a 401(K) Plan

      If you are the beneficiary of a 401(k) plan, the rules that apply to taking money out of the 401(k) plan are a little different. 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.