How to Get Money out of a 401k

Your ability to get money out of a 401k depends largely on two factors: whether or not you’re still employed, and which options your employer offers within the 401k.

You might want to pull your money out for several reasons, including:

  • You’ve stopped working at the company and you’re going to roll your funds elsewhere
  • You’re unhappy with the plan and the investments available
  • You need the money for bills, medical expenses, or an emergency
  • You’re going to use the funds elsewhere (perhaps to start a business)

Your reason for pulling money out of a 401k can be important. With certain options – such as a “hardship distribution,” described below – you’ll need a good reason. So keep that in mind as you read through the options.

No Longer Employed?

If you’re no longer employed with the company that runs the 401k plan, things are easy: you can simply ask to get your money out.

401k savings are usually locked up until you change jobs, but there are a few ways to get money out

401k savings are usually locked up until you change jobs, but there are a few ways to get money out

In most cases, you’ll complete paperwork, usually referred to as a “Distribution Request Form.” In other cases, you’ll simply make a phone call and provide instructions verbally. Either way, you need to let your former employer know what you want to do with the money:

  1. Roll it over
  2. Cash it out, or
  3. Some combination of both

Your request also needs to provide important details such as:

  1. Where the check should be sent
  2. Tax withholding
  3. Bank account information (if you’re using a wire or direct deposit)

To start the process, contact your former employer and let them know you’d like to get your money out of the 401k. Start with the HR or benefits department, or, if it’s a small company, the business owner or finance person. If you worked for a large organization, you might be able to call the investment provider that holds your money (Fidelity, for example) and handle things directly with them – just call the number on your statements.

Get Money out While Still Employed

If you still work for the organization that handles your 401k, it may be more difficult to get money. Some of the most common approaches for pulling funds out of a 401k are listed below.

Before using those options, it’s worth a reminder that you should do everything you can to avoid dipping into your 401k before retirement. It’s hard to rebuild your retirement nest egg, and 401k plans (along with a few other retirement accounts) have benefits that other investments might not offer. For more details, see Cash out a Retirement Account to Pay Off Debt?

Finally, talk with your Plan administrator about your options and read through your disclosures carefully – this page (that you’re reading right now) provides only enough information to get you started. Find out about any fees, tax consequences, and other effectsof using these options.

401k Loans

If your plan offers loans (some do, and some don’t – it’s a choice your employer made when they created the 401k plan), you might be able to borrow against your savings in the 401k. Generally you can borrow up to $50,000 or 50% of your account balance (whichever is less), and you’ll repay the loan through payroll deduction.

Benefits of loans: loans are appealing because you don’t need to qualify, and you don’t need to tell your employer why you need the money. If you’re going to start a business and quit your job, you don’t need to let the cat out of the bag before you lay the groundwork. If you or a family member is in financial hardship, your employer doesn’t need to know about it. Finally, there may be financial consequences of taking a loan, but at least you’re not taking a distribution that can never be returned to the plan.

Pitfalls of loans: why shouldn’t you get a loan? Aside from the opportunity cost of not having all your money invested, loans create problems for people who leave their job with a loan outstanding. If you quit, retire, or are fired, you’ll (usually) have the opportunity to repay the loan in a lump sum – but you wouldn’t have borrowed if you had money available in the first place. If you don’t repay, the IRS will treat the unpaid balance as a “distribution” from a retirement plan, and you might owe taxes and penalties.

For more details on 401k loans, including how to get one, repayment terms, the interest rate, and more, see: How to Borrow from your 401k and what it Costs.

Hardship Withdrawal

Hardship withdrawals are another option for getting money out of a 401k. Again, they are an optional plean feature that your employer might or might not make available to you.

If available, you can only take a hardship distribution if you qualify. That means you’ll need to inform your employer of the reason (by explaining what your “hardship” is), and your employer needs to agree with you and authorize the distribution. Acceptable reasons generally include:

  • Certain medical bills
  • Purchase of a primary residence
  • Higher education costs
  • Housing expenses to prevent eviction
  • And others

Your employer can tell you specifically which conditions you might qualify for.

With a hardship withdrawal, you simply take the money out for good – you won’t repay like you would with a loan. Because it’s a distribution, the IRS will be informed, and you may owe taxes and/or penalties for the year in which you take the distribution. For more details, see FAQs on Hardship Distributions.

In-Service Distribution

Some plans offer in-service distributions. That option allows you to withdraw funds while still employed. In most cases, you’ll need to be above a certain age to use an in-service distribution (59.5 for example).

An in-service distribution is a “distribution.” If you simply cash out (and have the check made out to you personally), you may owe taxes and/or penalties on the amount you withdraw. However, in some cases, it is possible to roll the money to another retirement account and avoid tax consequences. If that option is available, it’s best to have the distribution coded as a rollover and get the check made payable directly to the other retirement account.

For more details, see The Great 401k Escape.

An Easy Option?

If you can’t get money out of a 401k with a loan or hardship, and you’re too young for an in-service distribution, there might be another approach. If you’ve made a “rollover” contribution to your 401k (by moving funds from your previous job’s 401k into your existing 401k, for example), you might be able to take those funds back out. You won’t have access to your entire 401k account balance, but you might get a nice chunk of change out  – at any time, for any reason. Employers are often unaware of this option, so you may need to ask your employer to do some research with your Plan Administrator.

Again, you may have to pay income taxes and tax penalties, and you’re raiding your retirement savings, so only use this option when you have no other choice.

Photo source: Randen Pederson