Yes, you can take money from your 401(k), but the rules are strict and the costs are usually high

You can withdraw money from your 401(k) before age 59½, but your employer's plan must allow it, and you will almost certainly owe income tax plus a 10 percent early withdrawal penalty on the amount you take out. The exception is if you meet one of the IRS's narrow hardship rules — and even then, some plans do not permit withdrawals at all. The other option is a loan against your balance, which lets you borrow from yourself without triggering the penalty, though you have to repay it or face tax consequences.

The key difference between a withdrawal and a loan is that a withdrawal is permanent and taxable, while a loan is temporary and you repay it with after-tax dollars. Most people who need cash before 59½ should explore a loan first, because the penalty on a withdrawal is steep and when ready.

Key Takeaways

  • Early withdrawals before age 59½ trigger a 10 percent IRS penalty plus income tax on the full amount, unless you meet a hardship exception.
  • A 401(k) loan lets you borrow against your balance without penalty, but you must repay it within five years (or longer if buying a home) or it becomes a taxable withdrawal.
  • Hardship withdrawals are only for when ready financial need — medical bills, eviction, foreclosure, or funeral costs — and your plan must offer them.
  • If you leave your job, you can roll your 401(k) into an IRA or new employer plan to keep the money invested and avoid when ready taxes.
  • Once you turn 59½, you can withdraw any amount without penalty, though you still owe income tax.

How the 10 percent penalty and income tax work together

When you withdraw money from a 401(k) before age 59½, the IRS charges a 10 percent penalty on top of regular income tax. This means if you withdraw $10,000, you lose $1,000 to the penalty alone, and then you owe income tax on the full $10,000 at your tax bracket rate. If you are in the 22 percent tax bracket, you would owe $2,200 in income tax plus the $1,000 penalty, leaving you with $6,800 of the original $10,000.

Your employer withholds these taxes automatically — usually 20 percent federal withholding on the withdrawal amount — but that withholding is often not enough to cover both the penalty and your actual tax bill. You may owe more when you file your tax return, or you may get a refund if too much was withheld. The exact amount depends on your total income for the year and your tax bracket.

Taking a loan from your 401(k) instead of a withdrawal

A 401(k) loan lets you borrow money from your own account balance without triggering the 10 percent penalty. You repay the loan to yourself with interest — the interest rate is set by your plan, usually prime rate plus 1 percent — and the repayment goes back into your 401(k) account. As long as you repay on time, there is no tax consequence.

The catch is timing. You must repay a 401(k) loan within five years, unless you are using the money to buy a primary residence, in which case you may have longer. If you leave your job before the loan is repaid, you typically have 60 to 90 days to repay the full balance, or the remaining loan balance becomes a taxable withdrawal subject to the 10 percent penalty. This is a major risk if your job situation is uncertain.

Not all plans offer loans. Check your plan documents or ask your plan administrator whether loans are available to you. If your plan does offer them, you can usually borrow up to 50 percent of your vested balance, with a minimum loan amount (often $1,000) and a maximum (often $50,000).

Hardship withdrawals: when the IRS allows early access

The IRS allows early withdrawals without the 10 percent penalty only if you have an when ready and heavy financial need. Your plan must offer hardship withdrawals, and you must meet one of the IRS's specific reasons. The approved hardship categories are: unreimbursed medical expenses, costs related to a home purchase, tuition and education expenses, payments to prevent eviction or foreclosure, funeral and burial expenses, and expenses to repair damage to your primary residence.

Even if you meet one of these categories, you still owe income tax on the withdrawal — the penalty is waived, but the tax is not. You also have to prove the hardship is real and when ready. Your plan administrator will ask for documentation: medical bills, an eviction notice, a tuition invoice, or a funeral bill. You cannot straightforward say you need the money.

Hardship withdrawals are also limited to the amount you actually need to cover the hardship, not your entire balance. If you need $5,000 for medical bills, you can withdraw $5,000, not $20,000. Some plans also require you to suspend contributions for six months after a hardship withdrawal, which means you cannot add new money to the account during that time.

What happens if you change jobs

If you leave your job, you do not have to withdraw your 401(k) when ready. You have several options: leave the money in your old employer's plan (if the balance is above a certain threshold, usually $5,000), roll it into an IRA, or roll it into your new employer's plan if that plan accepts rollovers. A rollover moves the money without triggering taxes or penalties, as long as you complete it within 60 days or use a direct trustee-to-trustee transfer.

Rolling into an IRA gives you more investment choices and may lower your fees. Rolling into a new employer plan keeps everything in one place if you prefer that. Leaving it in the old plan is an option if you are happy with the investments and fees, though you will have less access to customer service.

The risk is taking the money out yourself instead of doing a rollover. If your old employer sends you a check for your balance, 20 percent is withheld automatically for taxes. You have 60 days to deposit the full amount (including the 20 percent that was withheld) into an IRA or new plan, or the full amount becomes taxable income and subject to the 10 percent penalty if you are under 59½.

Age 59½ and beyond: penalty-free withdrawals

Once you turn 59½, you can withdraw money from your 401(k) without the 10 percent penalty. You still owe income tax on the withdrawal, but the penalty goes away. This is the age the IRS considers retirement age for 401(k) purposes, even if you are still working.

At age 73 (as of 2023), the IRS requires you to take minimum distributions from your 401(k) each year, whether you need the money or not. These are called Required Minimum Distributions, or RMDs. The amount is calculated based on your age and account balance, and you owe income tax on whatever you withdraw. If you do not take the required amount, the IRS charges a 25 percent penalty on the shortfall (reduced to 10 percent if you correct it within two years).

Frequently Asked Questions

Can I withdraw money from my 401(k) if I am laid off?

Being laid off does not automatically let you withdraw without penalty. However, if you are age 55 or older and separated from service, you may be able to withdraw penalty-free under the "Rule of 55." Check with your plan administrator to see if your plan allows this exception. If you are younger than 55, you would owe the 10 percent penalty unless you meet a hardship category.

What if I need the money but my plan does not offer loans or hardship withdrawals?

If your plan does not offer these options, your only choice is a regular withdrawal, which means the 10 percent penalty and income tax. Some plans are more restrictive than others. Ask your plan administrator in writing what withdrawal options are available to you, and get the answer in writing so you have documentation.

If I take a loan and then leave my job, what happens?

When you leave your job, the loan typically becomes due within 60 to 90 days. If you repay it in full, there is no tax consequence. If you cannot repay it, the unpaid balance is treated as a withdrawal, which means you owe income tax plus the 10 percent penalty if you are under 59½. This is why a loan is risky if your job situation is uncertain.

Does a hardship withdrawal count against my contribution limit next year?

No. A hardship withdrawal does not reduce your annual contribution limit. However, some plans require you to stop making contributions for six months after a hardship withdrawal, so you cannot add new money during that period. Your plan documents will specify whether this suspension applies.

Can I undo a withdrawal and put the money back?

No. Once you withdraw money from a 401(k), it is gone. You cannot reverse the withdrawal or redeposit the money to avoid the tax and penalty. The only exception is a rollover from an old plan to a new plan or IRA, which must happen within 60 days and is treated as a transfer, not a withdrawal.