If you've been socking away money in your 401(k) plan for years, it can be tempting to take some out. Whether you want to move the money to an individual retirement account to take advantage of different investment options or higher rates of return, or you just want to spend the money, the rules for getting money out while you're employed are the same.
Your employer might allow hardship withdrawals in certain circumstances but it isn't required to, according to the Internal Revenue Service. If your 401(k) plan does allow for a hardship withdrawal, you must meet specific criteria to determine whether a hardship does, in fact, exist. At a minimum, you must have an immediate and heavy financial need. In addition, the plan can state that certain circumstances qualify while others don't. For example, the plan might allow for hardship distributions if you or a family member become seriously ill. But it might not allow for hardship distributions if you need to pay for your child's college tuition. In either case, early withdrawal penalties apply.
If you're 59 1/2 years old, you can cash out your 401(k) plan whenever you want without penalty because you're eligible for a qualified distribution. Once you've reached that magic age, neither your employer nor the IRS can stand in your way of getting out your money. Just bear in mind that you will still pay taxes on the withdrawal.
It's not quite cashing out, but in some ways a loan might be preferable to cashing out your 401(k) plan if you're not 59 1/2. With a loan, you can borrow up to $50,000 or 50 percent of your vested account balance, whichever is smaller, and repay it over five years. Plans aren't required to offer loans, however, so if your 401(k) plan doesn't, there's nothing you can do about it.
No Other Options
If you're not 59 1/2 yet, your plan doesn't allow for loans and you either don't have a financial hardship or can't get hardship withdrawal, you're out of luck. The money is stuck in your 401(k) plan. If you leave your job, you can cash out the money. But you'll still pay a 10 percent early withdrawal penalty, in most cases, if you're under 59 1/2.
- Internal Revenue Service: General Distribution Rules
- Internal Revenue Service: Retirement Plans FAQs regarding Hardship Distributions
- Internal Revenue Service: Retirement Plans FAQs regarding Loans
- IRS. "Retirement Topics - Hardship Distributions." Accessed Oct. 30, 2020.
- IRS. "Retirement Topics – Exceptions to Tax on Early Distributions." Accessed Oct. 30, 2020.
- IRS. "Retirement Plan FAQs Regarding Hardship Distributions." Accessed Oct. 30, 2020.
- Legal Information Institute. “11 U.S. Code § 522. Exemptions.” Accessed Oct. 30, 2020.
- IRS. “Retirement Plans FAQs Regarding Hardship Distributions.” Accessed Oct. 30, 2020.
- IRS. "401k Resource Guide – Plan Participants – General Distribution Rules." Accessed Oct. 30, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."