How to Withdraw Money From Your 401(k)

The Basic Rules for Taking Money Out

You can withdraw money from your 401(k) in three ways: after you leave your job, after you turn 59½, or through a loan against your balance. The rules differ sharply depending on which route you take. If you withdraw before 59½ and you are still employed by the company that sponsors the plan, you will owe income tax plus a 10 percent penalty on the amount you take out — unless you meet a narrow list of exceptions. Once you leave the job or reach 59½, the penalty disappears, though you still owe income tax on the withdrawal.

The plan document itself sets the terms. Some 401(k)s allow loans; others do not. Some let you withdraw while still working; others lock the money until you separate from the employer. You need to check your plan's specific rules before you assume you can take the money out. Your employer's benefits office or the plan administrator can tell you what your plan allows.

Key Takeaways

• Withdrawals before age 59½ while you are still employed trigger both income tax and a 10 percent penalty, unless you meet a narrow exception like disability or a may have access to hardship.
• Once you leave your job or turn 59½, you can withdraw without the 10 percent penalty, though income tax still applies.
• A 401(k) loan lets you borrow against your own balance and repay it through payroll, avoiding taxes and penalties if you repay on time.
• Required Minimum Distributions begin at age 73 (as of 2023) and force you to withdraw a calculated amount each year whether you need the money or not.
• The plan document controls what you can do, so contact your plan administrator or employer benefits office to learn your specific options.

Withdrawals While You Are Still Working

Most 401(k) plans do not allow you to withdraw money while you are still employed by the company that sponsors the plan. Some plans make an exception for a hardship withdrawal, which is a one-time withdrawal for specific financial emergencies. The IRS defines may have access to hardships narrowly: unreimbursed medical expenses, costs to prevent eviction or foreclosure, tuition and education fees, funeral expenses, or certain home repairs after a casualty. Your plan may have its own list that is shorter than the IRS list, so you need to check your plan document.

A hardship withdrawal is subject to income tax and the 10 percent early withdrawal penalty. You also cannot put the money back — it is gone from your retirement account. Some plans require you to stop contributing to the 401(k) for six months after a hardship withdrawal. Before you pursue this route, ask your plan administrator whether your situation meets the plan's hardship definition and what documentation you will need to provide.

Withdrawals After You Leave Your Job

Once you separate from your employer, you can withdraw your full 401(k) balance without the 10 percent penalty, though you will owe income tax on the amount. The tax is withheld automatically — the plan administrator will deduct federal income tax (and state tax if applicable) before sending you the money. You can request a different withholding rate when you process the withdrawal.

You do not have to withdraw everything at once. Many plans let you take partial withdrawals over time. Others require a lump sum. Check with your plan administrator about the withdrawal options available to you. If you leave your job before age 59½, you have the option to roll the money into an IRA or into a new employer's 401(k) plan instead of withdrawing it — this move avoids the immediate tax bill and keeps the money growing tax-deferred.

Withdrawals After Age 59½

Once you reach 59½, you can withdraw from your 401(k) without the 10 percent penalty, even if you are still working for the employer that sponsors the plan. You still owe income tax on the withdrawal. The plan must allow in-service withdrawals for this to work — some plans do, some do not. If your plan does not, you will have to wait until you leave the job.

At age 59½, you gain flexibility: you can take a small withdrawal one year and a larger one the next, or withdraw nothing at all. There is no requirement to take money out until age 73, when Required Minimum Distributions (RMDs) begin. The IRS calculates your RMD each year based on your age and account balance, and you must withdraw at least that amount or face a 25 percent penalty on the shortfall (reduced to 10 percent if you correct it within two years).

401(k) Loans as an Alternative to Withdrawal

If your plan allows loans, you can borrow up to 50 percent of your vested balance, with a maximum of $50,000. You repay the loan through payroll deductions, typically over five years, though the timeline varies by plan. The interest rate is set by your plan — it is usually the prime rate plus one percent. Because you are borrowing your own money, there is no income tax on the loan itself, and the interest you pay goes back into your account.

The catch: if you leave your job before the loan is repaid, the outstanding balance is treated as a withdrawal. You will owe income tax on the unpaid amount, plus the 10 percent penalty if you are under 59½. Some plans give you a grace period (often 60 to 90 days) to repay the loan in full before this happens. A loan makes sense only if you are confident you will stay in the job long enough to repay it, or if you have the cash to pay it off immediately if you leave.

Rollovers and Direct Transfers

When you leave your job, you do not have to withdraw your 401(k) and pay tax on it immediately. You can move the money to an IRA or to a new employer's 401(k) plan through a direct rollover. In a direct rollover, the plan administrator sends the money straight to the receiving account — you never touch it, and there is no tax bill or withholding.

A 60-day rollover is another option: the plan sends you a check, and you have 60 days to deposit it into an IRA or another 401(k). If you miss the deadline, the full amount is treated as a taxable withdrawal and subject to the 10 percent penalty if you are under 59½. Direct rollovers are simpler and safer because the money never passes through your hands. If you are leaving a job, ask your plan administrator about direct rollover options before you request a check.

Taxes and Withholding on Withdrawals

Every withdrawal from a 401(k) is subject to federal income tax. The plan administrator withholds tax automatically — the standard withholding rate is 20 percent for lump-sum distributions, though you can request a different rate. The amount withheld is sent to the IRS on your behalf, but it is not necessarily the full tax you will owe. When you file your tax return, you may owe more tax or receive a refund depending on your total income for the year.

State income tax may also apply, depending on where you live and where the plan is administered. Some states do not tax retirement income; others do. The plan will withhold state tax if required. If you withdraw before 59½ and do not may have access to for an exception, you will also owe the 10 percent penalty on top of income tax — this is a separate cost that is not withheld automatically, so you may need to pay it when you file your return.

Frequently Asked Questions

What happens to my 401(k) if I leave my job?

You can leave the money in the old plan, roll it into an IRA or your new employer's 401(k), or withdraw it and pay income tax. You do not have to decide immediately — most plans let you leave the money for several years. Contact your old plan administrator to learn your options and any deadlines for action.

Can I withdraw my 401(k) to pay off debt?

You can withdraw for any reason once you leave your job or turn 59½, though you will owe income tax. If you are still employed, most plans do not allow a withdrawal for debt. Some plans offer hardship withdrawals for specific situations like preventing foreclosure, but credit card debt typically does not may have access to. A 401(k) loan may be an option if your plan allows it.

What is the 10 percent penalty, and when do I owe it?

The 10 percent penalty applies to withdrawals taken before age 59½ while you are still employed by the plan sponsor, unless you meet an exception like disability, a may have access to hardship, or a series of equal payments under a specific IRS rule. Once you leave your job or reach 59½, the penalty no longer applies, though income tax still does.

Do I have to withdraw my 401(k) when I turn 65?

No. You can leave your money in the 401(k) as long as you are working, even past age 65. You must begin taking Required Minimum Distributions at age 73 (as of 2023), and the IRS will calculate the minimum amount you must withdraw each year. If you retire before 73, you still do not have to withdraw anything until that age arrives.

What is the difference between a rollover and a withdrawal?

A withdrawal is taxable income — you receive the money and owe tax on it. A rollover moves the money directly from your 401(k) to an IRA or another 401(k) without you receiving it, so there is no immediate tax. Rollovers preserve the tax-deferred growth of your retirement savings and are usually the better choice when you leave a job.