Taking money out of a 401(k) is a big decision. The specifics of how to take money out of a 401(k) plan depend on your age, employer plan, whether you’re still working for the company that sponsors your 401(k) plan and the type of withdrawal you’re making. If you’ve reached retirement age and are no longer working, it will be very a different process than if you’re still with a company, are taking money out early or need a loan. You’ll likely have to check your plan’s fine print to see which types of withdrawals are allowed.
Can I Take Money out of My 401(k) While Employed?
Not all employers allow you to take money out of your 401(k) plan while you’re still employed. Check with your 401(k) plan administrator or provider to see what’s possible. Generally, you’ll be able to take a 401(k) loan, hardship withdrawal or in-service distribution.
How to Take Money out of a 401(k) While Employed
1. 401(k) Loans
Taking a 401(k) loan allows you to receive a lump sum of your current 401(k) earnings and replace those funds with payments deducted directly from your paycheck. These payments include principal and interest. Some employers only allow loans in the case of financial hardship, but others allow 401(k) loans for employees that need to borrow money to buy a home, lease a car or fund other big expenses.
Most plans limit loans to $50,000 or half of your vested balance, depending on which is less. However, you may be able to borrow a greater percentage if your account is worth less than $20,000. There is generally not much paperwork and no credit check. You may have to pay a small processing fee, but that’s likely it.
You’ll typically need to repay the amount borrowed within five years unless you’re funding a primary residence with the loan. You will pay loans back with tax money, unlike initial 401(k) contributions, which are typically tax deductible. You should also be aware that 401(k) loans will cut into your investment growth, as you won’t be gaining compound interest on the amount you’ve borrowed from your plan.
2. Hardship 401(k) Withdrawals
If you’re going through a particularly difficult time and demonstrate a heavy and immediate financial need, most plans will allow hardship withdrawals. Typical reasons for hardship withdrawals include payments to avoid foreclosure on or eviction from your primary residence, a down payment on your first home, burial or funeral expenses, college tuition or other educational fees, medical expenses or the repair of damage to your home. You will likely need to explain your hardship to your 401(k) administrator. In some cases, your provider may ask you to provide proof of hardship.
Withdrawals are penalty-free in certain instances, such as if your medical debt exceeds 7.5% of your adjusted gross income, you’re disabled or you’re required by court to give money to a divorced spouse, child or dependent. Other hardship withdrawals will incur the 10% penalty. You will almost always have to pay regular income taxes on the amount withdrawn.
You cannot contribute to your 401(k) plan for six months after you take a 401(k) hardship withdrawal. After six months pass, you can resume contributions up to the maximum amount after that, but you cannot pay back the amount of the hardship withdrawal.
3. In-Service Distributions
Though rare, some plans allow you to withdraw money while you’re still employed using an in-service, non-hardship distribution. In-service distributions allow you to withdraw money before you reach a triggering event, like reaching a certain age or leaving your employer. This will allow you to roll over assets from your 401(k) to an IRA, which gives you greater flexibility and control over investment plan. However, this freedom comes with a cost: In-service distributions could incur greater fees and restrict future distributions.
How to Take Money Out of a 401(k) After You Retire
When you reach retirement, you have a few options. You can either start making qualified distributions, extract a lump sum, let your account continue to accumulate earnings or roll your 401(k) assets over to an IRA.
1. Regular 401(k) Withdrawal
This applies if you are over the age of 59 ½ or, in some cases, over the age of 55. Most providers allow regularly scheduled withdrawals on a monthly or quarterly basis. When you take money out of a 401(k), the remaining balance can continue to grow depending on your investment portfolio. If you wait until you are 70 ½ years old to withdraw, you will have to withdraw required minimum distributions, or RMDs, which are periodic amounts based on life expectancy and account balance. You can always withdraw more, but never less.
Financial advisors usually recommend a withdrawal rate between 2% – 7% a year, but it depends on your needs. Consider your life expectancy, expenses, other investments, family situation, employment status and Social Security benefits. You can calculate the potential outcome by assessing your account balance and current budget. We suggest looking at how a 4% withdrawal rate would add up, and adjusting from there.
The first step toward withdrawal is contacting your human resources representative or your 401(k) plan administrator or calling the number on your 401(k) plan statement. They can provide the paperwork you need to take money out of a 401(k).
2. Early 401(k) Distribution
This option applies to individuals who are not yet 59 ½ years old or 55, depending on the case, and are longer employed at the company. For early 401(k) distributions, you’ll pay income taxes and a 10% penalty tax.
3. 401(k) Rollover to IRA
This is a good option if you don’t want to regularly withdraw funds. When you roll your 401(k) over to an IRA, you can keep your money in the IRA and take it out only as you need it. You will only pay taxes on the amount you withdraw each year.
The paperwork and process will vary based on your employer and the type of withdrawal you’re making. After you complete the paperwork, you’ll receive a check for the requested amount.
Just keep in mind that withdrawals are subject to a 10% penalty if taken before age 59 ½. You’ll also have to pay income taxes on the amount and you’ll miss out on potential growth. It’s best to avoid taking retirement distributions early whenever possible.
Tips for Planning for Retirement
- To avoid ever getting into a situation where you’re forced to borrow from your 401(k) plan, consider consulting a financial advisor. A financial advisor can help you budget and optimize your savings. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you answer a series of questions about your situation and your goals. Then the program narrows down thousands of advisors to three fiduciaries who meet your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while doing much of the hard work for you.
- Get an idea of how much you’ll need to save for retirement. SmartAsset’s retirement calculator can help determine whether your retirement savings are on track.
- Start early and keep your money in your retirement account. The longer your money is in your retirement account and the more money that’s in there, the more work compound interest can do for you.
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