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Key points

  • Most 401(k) plans allow workers to withdraw money early.
  • Early withdrawals are typically taxed as income and may be subject to a 10% penalty.
  • The IRS waives the 10% penalty in certain circumstances.

Americans had an average balance of $112,572 in their workplace retirement accounts in 2022, according to Vanguard’s How America Saves 2023 report. 

Wouldn’t it be nice to tap into that money when you need it?

Making early withdrawals from 401(k) accounts is possible, but don’t rush off to make a request just yet. Many plans limit the circumstances in which you can withdraw money early, and doing so could result in a large tax bill and reduce the amount of savings you have available for retirement.

How to withdraw funds from your 401(k) early

Employers decide whether to allow early 401(k) withdrawals, but most companies offer this option. Ninety-five percent of employers allow hardship withdrawals at any age, according to How America Saves 2023, while 89% allow nonhardship withdrawals by workers 59½ or older.

Ask your plan administrator how to make a withdrawal request. Once it is approved and completed, money will be transferred from the 401(k) to you. You won’t have to repay the funds, but you will get a Form 1099-R so you can include the withdrawal on your income tax return.

401(k) early withdrawal rules

While employers decide whether to allow early withdrawals, the government dictates how they are taxed. Withdrawals from traditional 401(k)s before age 59½ are generally subject to:

  • Federal income tax.
  • State income tax.
  • A 10% penalty.

If you are 59½ or older at the time of the withdrawal, there is no penalty. But federal and state taxes still apply.

There are ways around the taxes, though. 

“You can make a (tax-free) withdrawal as long as you pay it back within 60 days,” said Michele Martin, president of Prosperity, an EisnerAmper company.

That means it may make sense to withdraw money for a short-term need when you know other cash is coming — for example, if you have a tax bill due now but a bonus scheduled for next month.

What is a hardship distribution?

A hardship distribution is money withdrawn from a 401(k) for an “immediate and heavy financial need,” according to the IRS. Examples include:

  • Medical costs.
  • Funeral expenses.
  • College tuition.

“Usually, the hardship withdrawal needs to be approved by the employer,” said Krisstin Petersmarck, investment advisor representative at Bridgeriver Advisors. But requests are rarely refused. 

“I’ve never had a client whose employer said no,” she said.

A hardship distribution is subject to income tax. A 10% penalty may also apply if you are younger than 59½. But the IRS waives the 10% penalty in the following circumstances:

  • Total and permanent disability of the plan participant.
  • Certified terminal illness of the plan participant.
  • Unreimbursed medical expenses in excess of 7.5% of adjusted gross income.
  • Certain distributions made to military reservists called to active duty.
  • Up to $5,000 per child for qualified birth or adoption expenses.
  • Up to $22,000 to individuals sustaining an economic loss as the result of a federally declared disaster.
  • Up to $10,000 or 50% of the account, whichever is less, for victims of domestic abuse by a spouse or domestic partner.
  • Up to $1,000 or the vested balance over $1,000, whichever is less, per calendar year for personal or family emergencies.

Tip: A hardship distribution is limited to the amount necessary to satisfy the financial need.

401(k) withdrawals: Penalties and tax consequences

Any withdrawal from a traditional 401(k) is subject to income tax. A 10% penalty is assessed on withdrawals made before age 59½ unless an exception applies. If you have a Roth 401(k), only earnings, not contributions, are subject to taxes and penalties.

Tip: Early withdrawals from Roth 401(k)s are prorated between contributions, which are nontaxable, and earnings, which are taxable.

In addition to the hardship exceptions listed above, you may avoid a penalty on distributions made as a result of a qualified domestic relations order. You can also withdraw money penalty-free from a 401(k) at a job you left at or after age 55, or age 50 for certain government workers.

Finally, you can avoid the penalty by setting up a series of substantially equal periodic payments. Also known as Rule 72(t) payments, they can be tricky to navigate. Petersmarck advises people to proceed with caution. 

“You are working directly with the IRS,” she said. “You’re opening Pandora’s box.”

Should you withdraw from your 401(k) early?

Withdrawing money from a 401(k) early isn’t something to be done lightly. “It should really just be in an emergency-type situation,” Martin said.

Be sure to carefully consider the pros and cons.

Pros

Here’s why you might want to withdraw money from a 401(k) early:

  • It provides cash without going into debt.
  • The withdrawal process may be easier than applying for a loan.
  • You can access the money in a wide range of circumstances.

Cons

For many people, the cons — and costs — of an early withdrawal outweigh the benefits:

  • You often owe income taxes and penalties.
  • It reduces the amount of money available at retirement.
  • Not all employers offer this option.

Alternatives to withdrawing from your 401(k)

Instead of taking an early withdrawal from your 401(k), consider these alternatives.

Take out a 401(k) loan

If you want to tap into your 401(k) but don’t want to pay taxes or penalties, consider a 401(k) loan. Assuming your employer allows loans, up to $50,000 or 50% of the vested balance, whichever is less, can be taken out as a loan and repaid over five years. Interest on these loans is paid back to your retirement account.

Use your personal savings

Everyone should have an emergency fund and be mindful of creating financial safety nets. If you have one, you can use that money rather than taking a withdrawal from your retirement account.

Set up a home equity line of credit

If you own a home, a home equity line of credit can provide access to cash. HELOCs allow you to borrow against the equity in your home. They may have a nominal annual fee, and interest rates can be competitive. In the end, paying a fee and interest may be cheaper than the taxes and penalties you’ll owe on an early withdrawal.

Adjust your budget

You may be able to cover an unexpected expense by running the numbers and realigning your budget. Consider temporarily suspending new contributions to your 401(k), transferring high-interest credit card balances to lower-interest credit cards with smaller monthly payments or cutting discretionary expenses such as dining out.

Frequently asked questions (FAQs)

You can stop contributing to your 401(k) anytime, but you can cash out only when you leave your job. At that time, if you choose to cash out, the money will be considered income by the IRS and may be subject to an additional 10% penalty, depending on your age.

While you are employed, you can take withdrawals from the account but can’t cash out. Remember that employers decide whether to allow early withdrawals. They are generally taxed as income and may be subject to a 10% penalty.

No, cashing out a 401(k) is only an option when you leave an employer. At that time, you can:

  • Keep the 401(k) at your previous employer.
  • Roll it over to a 401(k) at your new employer.
  • Roll it over to an IRA.
  • Cash out.

If you cash out, the money will be subject to income tax and possibly a penalty.

Yes, the IRS allows employers to determine whether early 401(k) withdrawals are allowed. But the vast majority of companies allow them. 

If you apply for a hardship distribution, your employer must approve the reason for your request. 

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Maryalene LaPonsie has been writing professionally for nearly 25 years and specializes in personal finance, retirement, investing and education topics. In addition to 91Ӱ Blueprint, her work has been featured on Forbes Advisor, 91Ӱ News & World Report, Money Talks News, MSN and elsewhere on the web.

Hannah Alberstadt is the deputy editor of investing and retirement at 91Ӱ Blueprint. She was most recently a copy editor at The Hill and previously worked in the online legal and financial content spaces, including at Student Loan Hero and LendingTree. She holds bachelor's and master's degrees in English literature, as well as a J.D. Hannah devotes most of her free time to cat rescue.