How to Get Money Out of a 401(k)

By Justin Pritchard, CFP®

You’ve done a good job of saving money, but nobody ever explained the process of taking money out of a 401(k). If you’re like most people, the priority has been adding funds.

Your ability to get money out of a 401(k) depends largely on two factors:

  1. Whether or not you’re still employed
  2. Which options your employer offers within the 401(k)

You might want to pull your money out for several reasons, including:

  • You’ve stopped working at the company and you’re going to roll your funds elsewhere
  • You’re unhappy with the plan and the investments available
  • You need the money for bills, medical expenses, or an emergency
  • You’re going to use the funds elsewhere (perhaps to start a business)

Your reason for pulling money out of a 401(k) can be important. With certain options—like the “hardship distribution” described below—you may need to qualify. So keep that in mind as you read through the options.

No Longer Employed?

If you’re no longer employed with the company that runs the 401(k) plan, you can typically take your money out of the plan simply by asking.

Continue reading below, or watch (or listen) to a video that shares the same information:

To submit your request, you might have several options:

  • Complete paperwork, usually referred to as a “Distribution Request Form”
  • Provide instructions verbally by calling your plan’s service provider
  • Enter your request online through your employer’s portal

Ultimately, you need to let your former employer know what you want to do with the money. The most common options for your 401(k) are:

  1. Roll it over
  2. Cash it out
  3. Some combination of the two above
  4. Take lifetime income from the plan

Your request also needs to provide important details such as:

  1. Where the check should be mailed (yes, they still mail checks)
  2. Tax withholding amount
  3. Bank account information (if you’re using a wire or direct deposit)

How to Start

To begin the process, contact your former employer and let them know you’d like to get your money out of the 401(k). Start with the HR or benefits department. Or, if it’s a small company, try the business owner or finance person. If you worked for a large organization, you might be able to call the investment provider that holds your money (Fidelity, for example) and handle things directly with them—just call the number on your statements.

Taking Money out While Still Employed

If you still work for the organization that handles your 401(k), it may be more difficult to get your money. Some of the most common approaches for pulling funds out of a 401(k) are listed below.

Before using those options, it’s worth a reminder that you should do everything you can to avoid dipping into your 401(k) before retirement. It’s hard to rebuild your retirement nest egg, and 401(k) plans (along with a few other retirement accounts) have benefits that other investments might not offer. For example, your 401(k) assets might be protected from creditors, but cashing out means you lose that protection.

Finally, talk with your Plan administrator about your options and read through your disclosures carefully. This page (that you’re reading right now) provides only enough information to get you started. Find out about any fees, tax consequences, and other effects of using these options.

401(k) Loans

If your plan offers loans, you might be able to borrow against your savings in the 401(k). But loans are an optional feature that your employer might not offer, so verify this before you make any decisions.

Generally, you can borrow up to $50,000 or 50% of your account balance (whichever is less), and you repay the loan through payroll deduction.

Benefits of Loans

Loans are appealing because you don’t need to qualify, and you don’t need to tell your employer why you want the money. If you’re going to start a business and quit your job, you won’t necessarily share that information before you’re ready. If you or a family member is in financial hardship, your employer doesn’t need to know about it. Finally, there may be financial consequences of taking a loan, but at least you’re not taking a distribution that can never be returned to the plan.

Pitfalls of Loans

Why might you avoid getting a loan? Aside from the opportunity cost of not having all your money invested, loans create problems for people who leave their job with a loan outstanding. If you quit, retire, or get fired, you often have the opportunity to repay the loan in a lump sum. But you wouldn’t have borrowed if you had money available in the first place. If you don’t repay, the IRS typically treats the unpaid balance as a “distribution” from a retirement plan, and you might owe income taxes and additional penalties.

Hardship Withdrawal

Hardship withdrawals are another option for taking money out of a 401(k). Again, they are an optional plan feature that your employer might or might not make available to you.

If available, you can only take a hardship distribution if you qualify. To do so, you must tell your employer why you need the funds, and your employer needs to agree with you and authorize the distribution. Acceptable reasons generally include:

  • Certain medical bills
  • Purchase of a primary residence
  • Higher education costs
  • Housing expenses to prevent eviction
  • And others

Your employer can tell you specifically which conditions you might qualify for.

With a hardship withdrawal, you don’t repay like you would with a loan. Because it’s a distribution, the IRS will be notified, and you may owe taxes and/or penalties for the year in which you take the distribution. For more details, see FAQs on Hardship Distributions.

In-Service Distribution

Some plans offer in-service distributions. That option allows you to withdraw funds while still employed. In most cases, you need to be above a certain age to use an in-service distribution (age 59.5 for example).

An in-service distribution is a “distribution.” If you simply cash out (and have the check made out to you personally), you may owe taxes and/or penalties on the amount you withdraw. However, in some cases, it is possible to roll the money to another retirement account and avoid tax consequences. If that option is available, it’s crucial to have the distribution properly coded as a rollover and have the check made payable directly to your retirement account.

Rollover Money: An Easy Option?

If you’re still working and you can’t get money out of your 401(k) with any of the techniques above, there might be another approach. If you ever made “rollover” contributions to your 401(k) (by moving funds from your previous job’s 401(k) into your existing 401(k), for example), you might be able to take those funds back out. You won’t have access to your entire 401(k) account balance, but you might get a nice chunk of change out—at any time, for any reason. Employers are often unaware of this option, so you may need to ask your employer to do some research with your Plan Administrator.

Again, you may have to pay income taxes and tax penalties, and you’re raiding your retirement savings, so only use this option when you have no other choice.