When Can I Take Money Out of My 401k?

401k’s are given favorable tax treatment by the US government to encourage retirement savings. The laws and regulations governing 401k plans discourage the use of 401k money for purposes other than retirement. Only under certain circumstances do federal regulations allow 401k plan sponsors to provide participants with access to their tax-deferred retirement savings before retirement.

There are three times that you may be able to access 401k plan assets other than retirement:

  1. You can cash-out (or rollover) your 401k at the time you change jobs;
  2. You can take money out by seeking a hardship withdrawal while still employed; or
  3. You can take money out by borrowing money from your 401k account while still employed .

How Participants Take Their Money From 401k’s

Total Annual Amount (2006)
Average Amount (2006)
401k Cashouts
$74 Billion
$4,166
Hardhip Withdrawals
$9 Billion
$3,123
Loans
$25 Billion
$2,126

It should be noted that plan sponsors have considerable latitude to set specific rules on accessing funds. For example, plans may (but are not required) to allow participants to borrow from their 401k. Further, a 401k plan may allow participants to take loans, but may place limitations on the amounts, purpose, or number of loans available. It is important, therefore, that participants check with their plan sponsors before taking action.

The table below compares the major federal law provisions concerning when you can take money out of your 401k. It also identifies the specific federal statutes governing this area.

Cash-out at Separation 401k Hardship Withdrawal 401k Loan
Amount Up to 100 percent of account balance. Limited to the amount of the employee’s elective contributions, and generally do not include any income earned on the deferred amounts. Up to 50 percent of a participant’s vested account balance or $50,000, whichever is less.
Allowable Purposes Participants may use the distribution for any purpose. Hardship withdrawal distributions must be made on account of an immediate and heavy financial need. The financial need may be immediate and heavy, even if the event was reasonably foreseeable or voluntarily incurred. A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for the following:

• expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care;

• costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

• payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, or dependents;

• payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence;

• funeral expenses; or

• certain expenses relating to the repair of damage to the employee’s principal residence.

General purpose.
Purchase of a primary residence.
Documentation Requirements Participant with account balances over $5,000 must affirm their decision to take a lump-sum distribution at job separation. Participants must provide documentation of their hardship. None for general purpose loans.
Evidence of imminent home purchase generally required for principal residence loans.
Associated Costs Participants are required to pay federal and state income taxes on the distribution amount.
Participants under age 59½ may be subject to 10 percent early withdrawal penalty.
Participants are subject to 20 percent employer withholding.
Federal and state income taxes.
Participants under age 59½ may be subject to 10 percent early withdrawal penalty.
Participants are subject to 20 percent employer withholding.
Must pay amount back to account, with interest.
Loans that are not repaid are treated as loan defaults and the outstanding loan balance is removed from the plan and sent to the participant as a taxable distribution of income.
Other Restrictions Available to participants only when separating from their employer.
Generally, a plan administrator must obtain participants’ consent before making a distribution from an account balance that exceeds $5,000.
Employers may cash out separating participants’ account balances under $5,000 from their plan without the participants’ consent. They may compel cashouts of balances under $1,000, but are required to roll over account balances of between $1,000 and $5,000 into an IRA.
A plan may only allow hardship withdrawals if participants have obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer.
Participants face a 6-month suspension of contributions to their accounts following hardship withdrawal.
Participants may not roll over any part of their hardship withdrawal into an IRA or other qualified plan.
Page 9 GAO-09-715
401(k) Plans
Loan repayments are not considered plan contributions.
Participants must repay loans in substantially equal payments that include principal and interest. The repayment period is within 5 years for general purpose loans, and is longer for primary residence loans.
Employee Retirement Income Security Act of 1974 Requires plan administrators to furnish participants with a summary plan description to ensure that all participants and beneficiaries in participant-directed individual account plans have the information relating to their benefits and rights under their plans. Requires plan administrators to furnish participants with a summary plan description to ensure that all participants and beneficiaries in participant-directed individual account plans have the information relating to their benefits and rights under their plans. Requires plan administrators to furnish participants with a summary plan description to ensure that all participants and beneficiaries in participant-directed individual account plans have the information relating to their benefits and rights under their plans.
Revenue Act of 1978 Provides for a cash or deferred arrangement under section 401(k) of the Internal Revenue Code. Provides for a cash or deferred arrangement under section 401(k) of the Internal Revenue Code. Provides for a cash or deferred arrangement under section 401(k) of the Internal Revenue Code.
Internal Revenue Code of 1986 Levies a 10 percent penalty for early withdrawals from qualified retirement accounts except for instances involving death, disability, severance from service, plan termination, or the attainment of age 59½. Levies a 10 percent penalty for early withdrawals from qualified retirement accounts except for instances involving death, disability, severance from service, plan termination, or the attainment of age 59½. Levies a 10 percent penalty for early withdrawals from qualified retirement accounts except for instances involving death, disability, severance from service, plan termination, or the attainment of age 59½.
NA NA Sets the maximum amount that the plan can permit as a loan as (1) the greater of $10,000 or 50 percent of a participant’s vested account balance or (2) $50,000, whichever is less.
Provides that a participant’s elective contributions to a 401(k) plan may not be distributed prior to the occurrence of certain events, such as the employee’s separation from service or a hardship. Provides that a participant’s elective contributions to a 401(k) plan may not be distributed prior to the occurrence of certain events, such as the employee’s separation from service or a hardship. NA
Provides that plan administrators may not cash out an account balance that exceeds $5,000 without the consent of the participant. NA NA
NA Prohibits a hardship withdrawal from being rolled over into an IRA or other qualified plan. NA
Provides exceptions for paying the 10 percent penalty on early withdrawals from qualified retirement plans. NA NA
Requires plan administrators to provide a notice to a participant of his or her right, if any, to defer receipt of an immediately distributable benefit. NA NA
Taxpayer Relief Act of 1997 NA Allows for distributions from certain plans to be used without penalty to purchase first homes. NA
Economic Growth and Tax Relief Reconciliation Act of 2001 NA Reduces elective contribution prohibition period following a hardship withdrawal, from 12 months to 6 months. NA
Requires automatic rollover of certain mandatory distributions unless a participant opts out and reduces the cap to $1,000 for involuntary cashouts at job separation. NA NA
Pension Protection Act of 2006 NA Permits hardship withdrawal distributions for expenses relating to medical, tuition, and funeral expenses for a “primary beneficiary.” NA
Requires plan sponsors to provide a notice to participants of the consequences of the failure to defer their account balance at job separation. NA NA