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Can I cash out my 401(k) while still employed? Yes, here’s how

Your 401(k) can be a lifeline when you’re in a pinch, and there are a few ways to avoid expensive taxes and fees when accessing it. Learn more about your options and when to tap into your 401(k) below.

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May 21, 2024

5 min. read

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Key takeaways:
  • You can tap into your 401(k), but you’ll negatively impact your retirement. The older you are, the harder it is to recover from.  
  • Unqualified early withdrawals before age 59½ are subject to income taxes (on traditional accounts) and a 10% early withdrawal penalty
  • There are tax- and penalty-free ways to access your 401(k) early, including loans and hardship withdrawals. 

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      Ideally, once you contribute cash to your 401(k), the money will be there to stay and compound for years to come. But life happens. Sometimes you need to tap into your investments to cover an unexpected expense. 

      In these cases, yes – you can cash out your 401(k) while you’re still employed. You have a few options, depending on your employer and circumstances. 

      But beware that you’ll likely owe income taxes on anything you take out. You might also have to cover an early withdrawal penalty, and will likely hurt your chances of retiring on time. 

      Here’s what else you need to know about dipping into your 401(k) while still employed. 

      Early withdrawal penalty Income taxes Maximum distribution Repayment
      401(k) loan
      • No penalty on loan
      • 10% penalty if repayment fails
      • No taxes owed
      • Taxes owed if repayment fails
      Up to 50% of your account balance with a max. of $50,000
      • Repayment within five years
      • Interest charged
      Early withdrawal penalty Income taxes Maximum distribution Repayment
      401(k) hardship withdrawal 10% penalty Taxes owed Limit based on financial need No repayment required
      Early withdrawal penalty Income taxes Maximum distribution Repayment
      401(k) Early withdrawal 10% penalty Taxes owed on pre-tax contributions Based on account balance No repayment required
      Early withdrawal penalty Income taxes Maximum distribution Repayment
      Roth IRA rollover
      • No penalty on contributions withdrawn
      • 10% penalty on earnings withdrawn
      Taxes owed on pre-tax contributions at time of conversion Penalty-free withdrawals on contributions No repayment required

      Option 1: Take out a 401(k) loan

      One of a 401(k)’s major advantages is that many employers allow you to take out a loan from your 401(k) account. 

      While borrowing from yourself, you’ll still owe interest and have to complete repayment within five years. This actually works out in your favor since it helps recover some of the lost returns from dipping into the account in the first place. 

      Pros: Cons:
      No 10% early withdrawal fee. Repayment required within five years of taking the loan.
      No income taxes owed. Interest charged on your loan can make repayment unaffordable.
      Large withdrawal limit up to 50% of your account value, with a $50,000 maximum. Limited to one loan per account.
      Repayments, plus interest, return to your account. Failure to repay the loan on time triggers a 10% withdrawal fee and owed income taxes.
      May require spousal consent if married.

      If you’re wondering how much you can borrow on your 401(k) loan, here are the IRS-imposed limits:

      • Borrow up to 50% of your account value until you reach the maximum limit of $50,000.
      • If 50% of your balance is less than $10,000, you can still borrow up to $10,000.

      Loans are common for:

      A 401(k) loan is convenient since interest rates are relatively low compared to other personal and payday loans, and approval is pretty quick and straightforward. They can also help you avoid paying income taxes and early withdrawal penalties, since you’re replenishing the account.

      Illustrations recap typical 401(k) loan rules.

      If you get a new job or quit before repaying the loan, your five-year repayment period reduces to 60 days. So make sure you’re in good standing before taking the loan. 

      If you can’t repay your balance, plus interest, you’re on the hook for income taxes and a 10% withdrawal penalty. However, the remaining loan amount might be eligible for a rollover to avoid tax and penalties.

      And keep in mind: Most employers typically only permit one 401(k) loan per account until it’s paid back. If you’re considering this option, make sure it’s truly an emergency. 

      How to get a 401(k) loan

      Since the loan is tied to your 401(k), you have to chat with HR and determine if your plan permits loans. The application process is as follows:

      1. Talk to Human Resources to determine your eligibility.
      2. Read the terms to find your plan administrator’s conditions (which may vary from the IRS rules), including the loan limit, repayment schedule, and interest rate. 
      3. Fill out the application provided.
      4. Begin repayment, which will kick in once you’ve received your funds. You can set automatic payments or repay the loan early without penalty. 

      Option 2: Apply for a hardship withdrawal

      If you’re in a bind and need cash quickly, you might qualify for a hardship withdrawal from your 401(k). The IRS determines eligibility based on having an “immediate and heavy financial need,” even if you expected it or caused the need to exist. 

      Pros: Cons:
      No 10% early withdrawal fee. Dependent on having an “immediate and heavy financial need.”
      No repayment required. Withdrawal amounts are limited by need.
      Only applicable to contributions – you can’t withdrawal from earnings.
      Income taxes owed on distributions.

      That said, you can’t withdraw more than you need for the expense, and you have to have exhausted all other sources of support, including:

      • Insurance
      • Asset liquidation
      • Pay after discontinuing 401(k) contributions
      • 401(k) plan loans 
      • Commercial loans

      Hardship withdrawals are common for:

      • Foreclosure or eviction
      • Natural disaster support or home repairs
      • Medical costs
      • Burial and funeral expenses
      • Education costs

      You can only withdraw elective deferral, employer match, or profit-sharing contributions – earnings on your contributions aren’t eligible for a hardship withdrawal

      These distributions can help you get through a tough financial situation, but they’re not tax free like 401(k) loans. You’ll owe income taxes on any traditional distributions (Roth distributions are tax free) and may have to pay an early distribution fee. 

      Illustration tiers cash sources from most to least risky, like 401(k) loans vs. your emergency savings.

      Option 3: Rollover to a Roth IRA

      Roth IRAs have a pretty valuable one-up on 401(k) accounts – you can make a penalty-free withdrawal on your contributions at any time, regardless of your age. And you can convert your traditional 401(k) into a Roth IRA to access this advantage.

      Pros: Cons:
      Withdrawals on Roth IRA contributions are tax free. Income taxes owed on pre-tax contributions at the time of Roth conversion.
      10% penalty on earnings withdrawn.

      One key difference is that you fund a traditional 401(k) with pre-tax dollars, and a Roth account accepts after-tax contributions. This means:

      • You’ll owe income taxes on your pre-tax contributions at the time of conversion (unless you’re rolling over a Roth 401(k)).
      • Withdrawals of contributions are tax free since you paid taxes before contributing to the account.
      • Withdrawals of earnings are tax free after owning the account for at least five years and reaching age 59 ½

      Since you’ll owe taxes upfront, this may not be the best choice if you’re actively working through a hardship. But it can act as a safety net if you’re worried about the future. For example, if you had to tap into your emergency fund and want an accessible backup plan as you replenish the funds. 

      Option 4: Take an early withdrawal with fees

      Finally, you can withdraw money from your 401(k) outright if your plan allows it. An early withdrawal is a 401(k) distribution to anyone under 59 1/2 years old. Withdrawals from traditional 401(k)s are subject to income taxes and a 10% early withdrawal penalty.

      We don’t recommend this because you’ll clear out a significant amount of your retirement savings, and the lost earnings can add up quickly.

      Pros: Cons:
      Accessible cash in an emergency. 10% early withdrawal penalty.
      Income taxes owed on withdrawals from a traditional 401(k).
      Reduced retirement savings.
      Lost tax advantages.

      IRS early withdrawal penalty exceptions

      The IRS does have several exceptions that might get you out of the 10% penalty on early withdrawals, including:

      • Qualified distributions of up to $5,000 for a child’s birth or adoption
      • Timely corrective distributions if you over-contribute
      • Distributions following the participant’s death
      • Distributions if the participant has a permanent disability or terminal illness
      • Qualified distributions up to $22,000 for federally declared disaster recovery
      • Emergency distributions up to $1,000, based on your remaining vested balance after a $1,000 withdrawal
      • Up to $10,000 for first-time homebuyers
      • Rollovers to another retirement plan made within 60 days

      Pros and cons of cashing out your 401(k)

      The pros of cashing out your 401(k) are slim, while the cons are pretty hefty. Generally, tapping into your retirement savings early is a mistake, but it’s there if you absolutely need it and may be less expensive than other options for quick cash.

      When you withdraw from a retirement account, the money stops earning interest. So you’re losing more than the cash value of your distribution. 

      It also reduces your overall account balance, which means slower growth for what remains. Consider that 4% annual returns on $10,000 is $400, compared to $20,000 earning $800. 

      And in many cases, you’ll have to pay taxes and withdrawal fees up front, which means you need to cash out an even larger balance to cover all of the costs when you’re in a tight spot. 

      It’s extremely difficult to recover from, and it only gets harder the closer you are to retirement age. 

      The Playbook take: Leave your retirement be

      Things don’t always go as planned. Sometimes big expenses pop up and you need cash quickly. In a financial emergency you might need to tap into your 401(k) while you’re still employed. 

      To avoid the expensive taxes or penalties of taking a standard withdrawal from your 401(k), you can consider a loan, hardship withdrawal, or even rolling over your funds into a Roth IRA. 

      If you’re considering a less pressing issue, like putting a down payment on a house, take your time. It’s best to save specifically for that expense rather than tapping into your retirement savings.

      Sign up for Playbook to learn how to maximize your tax advantages and save more for retirement.

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      About the author

      Theo Katsoulis, CFA

      Head of Investments

      Theo brings an extensive background in Institutional Asset Management. With a B.A. from Villanova University's School of Business, and having passed the rigorous Series 65 and CFA examinations, he brings significant expertise from portfolio management to understanding intricate financial infrastructures. As Head of Investments at Playbook, he ensures consumers receive exceptional diligence and care for their investment portfolios.

      Tanza Loudenback, CFP®

      Editor

      Tanza is a CFP® certificant, writer, and editor. From 2015 to 2021, she was a top-read author and editor at Insider. Her work focuses on helping people make smart decisions with their money and is published by a variety of online publications.

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