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Options if you need your 401(k) money now

Key takeaways

  • Your 401(k) is meant for retirement, but it may be possible to access your money sooner.
  • If you make an early 401(k) withdrawal, you’ll typically owe income taxes and pay a 10% penalty.
  • There are alternatives to consider before tapping a 401(k), such as a home equity loan or personal loan.

A 401(k) can be a great tool to help you save and invest for retirement. Pre-tax contributions to a traditional 401(k) can help reduce your taxable income today, and you won’t owe taxes until you make withdrawals, usually in retirement. But you might wonder: What if I need some or all of my 401(k) money now? Financial emergencies happen—and in some cases, drawing on your 401(k) may be your only option. Here are the different ways to access your 401(k) money, along with pros and cons to consider.

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Can I withdraw from my 401(k) before age 59½?

Yes, you can withdraw from your 401(k) for certain situations before age 59½ if your plan allows. The money you’ve contributed to your 401(k) is yours to keep. But that doesn’t mean there are no consequences to early 401(k) withdrawals. Taking out money before age 59½ usually triggers a 10% early withdrawal penalty, on top of income taxes. However, if you wait to withdraw until after age 59½, your withdrawals will be penalty-free. Keep in mind that even qualified withdrawals have to abide by your plan rules around in-service and hardship withdrawals.

Options if you need your 401(k) money now

There are a few different ways to access your 401(k) assets before you turn age 59½, after which there are no penalties for withdrawing. Some of these options don’t come with penalties either.

Qualified early withdrawal

A qualified early withdrawal, which is not subject to the early distribution penalty, is different from a hardship withdrawal in that an employer doesn’t determine what counts as one. Instead, the circumstance must meet certain IRS criteria, and the IRS sets limits for withdrawal amounts depending on the situation. If eligible, that 10% early withdrawal penalty would be waived. Here are some, but not all, qualifying situations and their respective withdrawal limits:

  • Birth or adoption costs: up to $5,000 per child
  • Death or total and permanent disability: no limit
  • Disaster recovery: up to $22,000 per federally declared disaster
  • Emergency personal expense: Each calendar year, up to $1,000 (or vested account balance over $1,000, whichever is less) can be used for a personal or family emergency if it’s repaid or deferred. Otherwise, it’s once every 3 years.
  • Medical expenses: any unreimbursed amount greater than 7.5% of your adjusted gross income (AGI)

While qualified early withdrawals aren’t subject to the 10% penalty, you’d still need to pay income taxes on this money. Another consideration is that an early withdrawal could push you into a higher tax bracket, depending on the size of your withdrawal and your current income. That could significantly bump up your tax bill in the year you made the withdrawal. Even if you’re retired, 401(k) withdrawals still count as taxable income, unless it’s from a Roth 401(k) or a return of after-tax contributions. Before you go this route, remember you’re taking a bite out of your retirement savings and potential future returns.

Early withdrawal

An early withdrawal is one you make before age 59½ at any time and for any reason. You will owe the early withdrawal 10% penalty. For traditional 401(k)s, you’d also have to pay federal income taxes—and possibly state taxes—on the withdrawal.

The same reminders apply as for qualified early withdrawals: You could get pushed into a higher tax bracket, and you need to follow your plan’s rules.

401(k) loan

Instead of withdrawing from your 401(k), you could opt for a 401(k) loan. This can allow you to borrow up to 50% of your account’s vested balance or $50,000 (whichever is less), which is reduced by your highest outstanding loan balance over the last 12 months. You then repay what you’ve borrowed, plus interest, usually within 5 years of taking out your loan. The interest rate, which is set by your plan, is typically the prime rate, the interest rate charged by banks to their most creditworthy customers, plus 1% to 2%, which is relatively low compared to other types of loans.

The main benefit of a 401(k) loan is you don’t owe the early withdrawal penalty or taxes on the loan amount if you abide by the terms of the loan. And those interest payments? They go directly into your account, so you’re paying interest to yourself instead of to a lender.

401(k) loans still have potential drawbacks. On top of missing potential investment growth from money borrowed, if you leave your employer before you repay the loan, you may be required to pay it back in full all at once, even if you lose your job rather than quit. If you’re unable to cover those costs, you’d typically owe taxes and the early withdrawal penalty on the unpaid balance.

Watch now: The pros and cons of 401(k) loans

Hardship withdrawal

If you experience an immediate and heavy financial need, you may be able to make a hardship withdrawal from your 401(k). If you qualify based on your plan rules, you can withdraw up to the amount necessary to cover your need, plus the income taxes you’d be on the hook for. You may also have to pay a 10% early distribution penalty unless you are age 59½ or older.

The IRS has 7 circumstances that qualify for a 401(k) hardship withdrawal without needing documentation to prove hardship, including:

  1. Medical expenses for you, your spouse, or dependents that are deductible under Code Section 213(d)
  2. Costs related to buying your principal residence (mortgage payments generally don’t qualify, unless they’re to avoid foreclosure)
  3. Payments necessary to avoid eviction or foreclosure on a mortgage from your principal residence
  4. Expenses to repair damage to your primary residence if it’s a result of a casualty under IRC Section 165
  5. Tuition or other related education costs (like room and board) for the next 12 months of postsecondary education for you, your spouse, or dependents
  6. Funeral expenses for you, your spouse, children, or dependents
  7. Expenses and losses incurred by participants on account of a disaster declared by FEMA, provided the participant’s principal residence or place of employment at the time of the disaster was located in a FEMA-designated area

While these reasons don’t require proof, your employer may require documentation to certify your hardship. Even if you don’t have to provide documentation, it’s smart to record all facts, bills, and receipts related to your 401(k) hardship withdrawal in case of an audit. As with a regular early withdrawal, this option reduces the amount of money—plus any additional gains—you’ll have to draw on in retirement.

Here’s the full list of IRS exemptions and limits:

Rule of 55 distributions

If you have a 401(k) and leave your employer for any reason—whether you quit or lose your job—in the year you turn age 55, the Rule of 55 allows you to access that money without incurring the 10% early withdrawal penalty. But just because these withdrawals are penalty-free doesn’t mean they’re tax-free—you may owe income taxes on any early withdrawals, including those made under the Rule of 55.

Other alternatives to early 401(k) withdrawals

If you’re in a pinch and need money fast, you may not need to dip into your 401(k). Consider one of the following alternatives:

Emergency savings

If you have robust cash reserves for emergencies, this is a good time to draw from it. (We generally suggest keeping 3 to 6 months of expenses in cash, such as in a checking or savings account, as emergency savings.) If you withdraw from emergency savings, though, you should start to replenish those dollars as soon as you can.

0% introductory credit card

Many credit cards offer a promotional introductory period with 0% interest. Using one could be good for covering an emergency expense if you’d be able to pay off the balance before the introductory period ends. However, if you aren’t able to pay off the balance by then, your interest rate could be 20% or more.

Home equity loan

If you own a home and have significant equity because you’ve paid off a lot of your mortgage, you own your home outright, or your home has increased in value, you may be able to take out a home equity loan or home equity line of credit (HELOC) with a competitive interest rate. That keeps your 401(k) balance safe. Keep in mind that the penalty for not repaying the loan according to the terms could be losing your home.

Personal loan

Unlike a home equity loan, you might not need to offer any collateral with a personal loan. Interest rates on this kind of loan can be fixed or variable. The stronger your credit, the more likely you are to secure a favorable rate.

In any of these cases, it’s important to avoid borrowing more money than you can realistically repay by the deadlines.

How to take an early withdrawal from your 401(k)

To make an early withdrawal from your 401(k), you’ll likely need to do the following:

  • Reach out to your HR department or 401(k) plan administrator
  • Ask about the availability and the process for taking early withdrawals
  • Be prepared to explain why you need the money—your plan administrator may need this information to determine if your withdrawal counts as a hardship or qualified withdrawal
  • Once your request is approved, you’d likely receive the money (minus any necessary tax withholding) within 10 business days
  • If you owe the additional 10% tax on early withdrawals, you will also need to report the early distribution on Form 5329 during tax season

How to get a 401(k) loan

The steps to take out a 401(k) loan are similar to requesting an early withdrawal:

  • Contact HR or your plan administrator for details, including how much you’re allowed to borrow, the interest rate, and the repayment schedule
  • Fill out the required paperwork, if necessary
  • Receive your funds, usually within 10 business days of approval

Repayment likely begins once you receive the loan, so be sure to account for those payments in your monthly budget.

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More to explore

Investing involves risk, including risk of loss.

A distribution from a qualified retirement plan (other than an IRA) made to you after your separate from service with your employer may be penalty free if the separation occurred in or after the year you reach age 55. Note that while penalty free, earnings on Roth contributions are taxable if you are under the age of 59.5 at the time of distribution.

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