Most 401k plans do not allow plan participants to make withdrawals from their accounts while they’re still employed at the company. However, if you need access to your 401k funds, and don’t have any plans to quit your job, there are several alternative options to withdrawing from your 401k without leaving your employer.

How 401k withdrawal typically work

Typically, you cannot withdraw from your 401k plan until you reach the eligible withdrawal age of 59½ years old. Any early withdrawals are subject to a 10% penalty plus income taxes on the amount drawn.

Withdrawals after the age of 59½ have no penalties, but you’ll still have to pay regular income taxes on the amount you withdraw. If your plan offers a Roth 401k option, eligible withdrawals from your Roth account are tax-free since you contributed with after-tax dollars.

Usually, 401k plans will not allow you to withdraw your funds if you’re still employed at the company. Check with your employer or plan administrator first, and if they confirm that in-service withdrawals are not allowed, then start looking into the alternative options below.

Option 1: Take a 401k loan (if available)

A loan from your 401k allows you to borrow up to 50% of your account balance, up to a maximum of $50,000. There are no penalties or taxes for taking a 401k loan, and it doesn’t affect your credit score. There are no credit checks, and no long application processes. Because you’re borrowing from your own account, you can typically access the money in a matter of days and use it however you wish.

Like in-service withdrawals, not all plan providers offer the option to take a 401k loan. 

What are the interest rates?

The interest rate on a 401k loan is prime rate plus one or two percent. All interest payments go back into your own account. They don’t count as repayment of the loan, just interest charges.

When do I have to repay the loan?

You get 5 years to repay the 401k loan. If you use the money to purchase a primary residence, you could get up to 15 years to pay it back.

However, if you quit your job or get terminated while you have a 401k loan, your employer may require that you return the money in full, with interest, by next year’s tax filing deadline. Your 5 years repayment period could get reduced to weeks or months, depending on the time of year, so it’s important to only take a 401k loan if you’re certain that you’ll stay at the company for at least the next 5 years.

What happens if I don’t pay back the loan on time?

Missed 401k loan payments don’t affect your credit score. Instead, the IRS will treat the loan as an early distribution and will be subject to a 10% early distribution penalty plus income taxes on the amount that was borrowed.

Option 2: Apply for a hardship withdrawal

While 401k loans and in-service withdrawals are not available with all 401k plans, most providers let participants take out a hardship withdrawal in certain situations. Hardship withdrawals are recognized by the IRS, and have no early withdrawal penalties, if you have require a distribution due to an immediate and heavy financial need. The caveat is that you can only withdraw enough to cover the financial need.

What qualifies as a hardship withdrawal?

  • You become disabled or pass away.
  • Money for funeral expenses.
  • Unreimbursed medical bills
  • Health insurance premiums (if you were unemployed for at least 12 weeks).
  • Higher education expenses for yourself, spouse, children, grandchildren, or immediate family members.
  • For buying your first home, you can take out a maximum of $10,000.
  • Money needed to prevent eviction or foreclosure.
  • Money needed to repair damages to your principle residence.

Option 3: Rollover your 401k into another retirement plan

Like in-service withdrawals, many 401k plan providers do not allow rollovers while you are still employed at the company. However, some providers will allow rollovers, but not in-service withdrawals.

If rollovers are allowed while you’re still employed, you could rollover your 401k assets into another retirement plan like a traditional IRA, Roth IRA, or even a solo 401k. Withdrawal rules are the same across most retirement plans: You cannot withdraw from your account until you reach the age of 59½. Early withdrawals are subject to a 10% penalty, plus income taxes.

However, you can still decide to take the penalty and withdraw the funds from those accounts. Rollovers typically do not have any penalties or taxes, so you would just need to pay the 10% penalty and income taxes once.

Even if you don’t decide to withdraw the funds, rolling over your assets into an IRA or solo 401k can give you more tax benefits through additional investment choices. A 401k plan usually only lets you invest in a handful of mutual funds selected by your employer. With an IRA, you can invest in a wider range of traditional assets like stocks, bonds, mutual funds, and ETFs. With a solo 401k, you can invest in any asset class, including alternative assets like crypto, real estate, and private equity.