Article originally published March 31st, 2020. Updated December 16th, 2022.
The Coronavirus Aid, Relief, and Economic Security Act, an economic relief package in response to the COVID-19 coronavirus pandemic, waives the 10% early withdrawal penalty for individuals who take out up to $100,000 from qualified retirement accounts for coronavirus-related purposes. Learn More.
Note: This article does not constitute legal advice. Please consult a lawyer or financial/ tax advisor about your specific situation.
Paying off debts or covering an unplanned expense are common reasons people tap into their 401(k)s early. But a 401(k) withdrawal can come with hefty tax penalties if you pull your money out too soon. Find out more about how to take money out of a 401(k) below, and decide whether it’s the right decision for you.
How to Withdraw from Your 401(k) Early
Your 401(k) account is meant to be a retirement account. That means it’s set up for you to start withdrawing from after a certain age—generally 59 ½. But you may be able to withdraw sooner if you feel you need your money now. Here’s how.
Check with your employer to find out if early withdrawals are an option. Not every employer allows withdrawals.
Find out what types of withdrawals are allowed. In some cases, 401(k) withdrawals are limited to certain amounts or allowed only for certain reasons.
Get withdrawal paperwork from your human resources department or download it from your 401(k) provider’s site.
Review the penalties and taxes you may pay for taking the money out early and ensure that you are okay with them.
Complete the paperwork and submit it. Disbursements may be made by check or directly into your bank account, depending on the provider, and may take up to several business days once the 401(k) withdrawal is approved.
401(k) Early Withdrawal Penalty
In general, when you make a withdrawal from your 401(k) before you reach age 59 ½, the Internal Revenue Service may charge you a 10% early withdrawal penalty.
You’ll also pay taxes on any amounts you cash out. That’s because your 401(k) was funded with pre-tax income from your paycheck. You didn’t pay taxes on it at that time, but you must pay taxes on the money when you draw it out to use as income later.
401(k) Hardship Distribution
If your employer plan provides for hardship distributions, you can take a portion of your 401(k) funds to assist in paying for some specific expenses without paying the standard 10% early withdrawal penalty. Each employer plan is different, though, so even if your plan allows for hardship distributions, it may not allow for the particular use you have in mind.
For example, some plans allow for medical or funeral expenses but will not allow for tuition and education expenses. Some plans will, regardless, the plan must have clear requirements. Before considering a hardship distribution, be sure to read the fine print on your plan to determine if your need is eligible.
In general, some expenses that can be covered using a hardship distribution might include:
Tuition, including room and board, for yourself, your spouse, dependents and certain beneficiaries
Medical expenses for yourself, your spouse or dependents
Purchase costs for your principal residence, not including mortgage payments
Costs related to avoiding foreclosure on or eviction from your principal residence
Repair costs for damages to your principal residence
Funeral expenses for deceased parents, spouse or dependents
Hardship withdrawals have hit a record high for the first time in nearly 20 years.This kind of spike is a testament to how it has become increasingly difficult for Americans to have a retirement safety net in the current economic climate. This increase is likely due to inflation concerns creating further economic hardship. Use this guide before considering a 401(k) withdrawal.
Even though the early distribution penalty is waived on approved hardship distributions, any withdrawal you make is taxed as regular income. You should consider what that means for your bottom line and review whether you’re pushing up against a higher tax bracket when taking the withdrawal into consideration.
401(k) Loan
Another way to get money from your 401(k) now without paying the withdrawal penalty is a 401(k) loan. This can be a good option if you can’t get a hardship distribution or want to borrow against your 401(k). Plans are not required to provide for loans, so review your plan to determine if this is an option for you.
What Is a 401(k) Loan?
A 401(k) loan is literally a loan that’s funded by your 401(k). When you take out this type of loan, you actually borrow from your future self. These loans come with interest, which you pay back into the 401(k) account—so you’re paying the interest to yourself.
401(k) loans let you take out a certain amount from your 401(k)—usually up to $50,000 or 50% of the account’s assets—without calling it “income.” You can use that money without paying the 10% withdrawal penalty or paying taxes on it.
Advantages of 401(k) Loans
Unlike a hardship distribution, you do not need to demonstrate financial need to take out a 401(k) loan. As long as your plan allows for loans and you meet the terms, you can take out this type of loan. Because interest payments on these loans are only meant to restore the account to its original state (as if you had not taken out the loan), 401(k) loans often have lower interest rates than other loans. And 401(k) loans for approved purposes may not require a credit check, so they might be an option when other credit is not. This is especially true as your employer may simply take the 401(k) loan repayments directly out of your paycheck.
Disadvantages of 401(k) Loans
When you take money out of your 401(k), it’s no longer earning interest for you. Typically, the interest you pay on the loan isn’t as much as your 401(k) could be earning in the same time period. That can mean a reduced total when it comes time to retire.
In most cases, you are required to repay a 401(k) loan within five years. If you quit your job before you pay off the total amount of the loan, you might be asked to repay the rest immediately. If you fail to meet the terms of the loan, the remainder of the loan might be treated as a withdrawal. That means you’re on the hook for taxes and the 10% withdrawal penalty.
401(k) Withdrawals After Age 59½
If you retire or lose your job after you turn 55, you may be able to avoid the 10% early withdrawal fee. In general, this applies only to the 401(k) plan from the employer you just left. Earlier plans are not eligible.
Once you reach age 59½, you may begin withdrawing funds from your 401(k) without penalty. You can choose a lump-sum distribution or periodic distributions based on your personal needs. Keep in mind that you’ll pay income taxes on lump-sum distributions right away. It’s a good idea to talk to your financial planner to decide what option is best for you.
You can, however, leave your retirement funds where they are until you reach age 72. At that point, plan participants encounter Required Minimum Distributions, when the IRS requires that you begin taking distributions of a certain amount each year (before 2020, the age was 70½). Your tax burden on those distributions will depend on your total annual income.
Are There Good Alternatives to Early 401(k) Withdrawals?
For those with good credit scores, there are a number of alternatives to 401(k) withdrawals that don’t come with a 10% tax penalty and don’t dip into your retirement savings. Here are a few options to consider.
Home Equity Lines of Credit
If you have equity in your home—which means it’s worth more than you owe on it—you might be able to borrow against that value. You can then use the money from a home equity line of credit (HELOC) to cover expenses or pay down other debts.
Pros: Because home equity lines of credit are secured, you may be able to secure a lower interest rate on them than with other types of debt. They also offer some flexibility, as you can use as much of the line of credit as you need as you see fit.
Cons: You need equity to access this type of debt. You also have to ensure you can pay it off if you plan to sell your home.
Personal Loans
Personal loans are typically unsecured debts you can use for personal purposes. If you’re approved for a personal loan, you might use it to pay off medical bills, consolidate other debts or cover an emergency home repair, for example.
Pros: Personal loans are available for all types of credit histories and needs. Doing a little research can often turn up a loan option that might work for you. Repayments are typically made over long periods, which can make monthly payments affordable.
Cons: Depending on your creditworthiness, a personal loan can come with a higher interest rate than other options. If you have bad or no credit, you may be limited to credit building loans, which can require a deposit.
Credit Cards With Low APR Introductory Offers
Credit cards with an introductory 0% APR on purchases make it possible to finance a large purchase and pay it off over several months without paying interest.
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Pros: Credit cards with low APR offers can let you finance purchases or consolidate credit card debt and pay it off faster. They can also help you continue to improve your credit as you make timely payments.
Cons: Most of these cards require good to excellent credit. If you don’t pay off the balance within the required period, you can get hit with hefty interest rates.
Your 401(k) and Your Future
When you’re facing a financial crisis right now, borrowing from your 401(k) can seem like an obvious answer. But carefully weigh the costs of doing so. You are, in effect, stealing from your future. If you can, look for other options that help both current-you and future-you.
