Can I Cash Out My 401(k) While Still Employed?

While some retirement plans allow in-service withdrawals, most discourage early access with penalties, taxes and missed growth potential. Before making a move that could undermine your long-term retirement goals, it helps to know the rules.

A financial advisor can help you balance today’s needs with your long-term retirement goals.

Cashing out your 401(k) while still working isn’t always allowed, but some plans offer limited flexibility through what’s known as an in-service withdrawal. This option allows you to access funds from your retirement plan while still employed by the sponsoring company.

Typically, you must meet one or more of the following conditions:

• Be at least 59½ years old: Most plans won’t allow a distribution unless you’ve reached this age.
• Be eligible under plan rules: Some employers allow in-service withdrawals for specific situations, such as financial hardship or for specific account types like after-tax contributions.
• Request a hardship withdrawal: This allows you to take funds due to a documented immediate and heavy financial need, but this is not the same as “cashing out” without justification.

You should check your specific plan’s Summary Plan Description (SPD) or speak with your HR department to learn which rules affect you most.

If you’re under 59½ and your plan does allow you to cash out, note that the IRS imposes strict consequences for early distributions.

• A 10% early withdrawal penalty: Unless an exception applies under IRS rules.
• Ordinary income tax: The IRS adds the withdrawn amount to your taxable income for the year, potentially pushing you into a higher tax bracket.
• State tax penalties: Depending on your location, you may also owe additional state-level taxes or penalties.

Together, these costs can reduce your withdrawal by 30% or more. That’s a steep price to pay for early access to funds.

There are some situations where the IRS waives the 10% early withdrawal penalty, though income tax still applies. Common exceptions include:

• Total and permanent disability
• Unreimbursed medical expenses that exceed 7.5% of your AGI
• A qualified domestic relations order (QDRO) due to divorce
• Substantially Equal Periodic Payments (SEPPs) over your life expectancy
• Birth or adoption expenses up to $5,000 per parent

Note that these exceptions don’t guarantee your employer’s plan allows withdrawals, they simply waive the penalty if one occurs.

Cashing out is generally considered a last resort. Alternatives that may have less impact include:

• 401(k) loan: Many plans allow you to borrow up to $50,000 or 50% of your vested balance (whichever is less). Payback for a 401(k) loan is typically via payroll deductions, and no taxes are due if repaid on time.
• Hardship withdrawal: If facing a financial emergency, you may qualify for a hardship withdrawal for specific expenses (e.g., medical bills, funeral costs, tuition). These aren’t repaid, but may offer a penalty exception.
• Use other assets: Consider tapping a high-yield savings account, brokerage account, or home equity line before draining retirement funds.
• Roth IRA contributions: You can withdraw contributions (but not earnings) from a Roth IRA at any time without taxes or penalties.

Cashing out retirement funds early can reduce long-term financial security, since withdrawing now also means losing the future growth those savings could have earned through compounding. For example, a $20,000 withdrawal today could reduce your nest egg by almost $80,000 at retirement, if you assume a 7% annual return over 20 years.

The math works like this:

• Formula: FV=PV×(1+r)nFV = PV times (1 + r)^nFV=PV×(1+r)n
• Inputs: PV = $20,000, r = 0.07, n = 20
• Step 1: 1+0.07=1.071 + 0.07 = 1.071+0.07=1.07
• Step 2: 1.0720≈3.86971.07^{20} approx 3.86971.0720≈3.8697
• Step 3: 20,000×3.8697≈77,39420,000 times 3.8697 approx 77,39420,000×3.8697≈77,394

This shows that cashing out a $20,000 loan today means you lose not only the $20,000 itself but also about $57,400 in potential growth, for a total reduction of roughly $77,400 over 20 years at a 7% return. That single decision can permanently shrink the amount you have available for retirement.

Beyond the missed growth, taking money out also reduces the principal in your account, which limits the base that could otherwise compound and generate income in later years. This can leave you with fewer resources to cover expenses and may lower your standard of living in retirement.

Large withdrawals can also create immediate tax consequences. Adding the balance to your taxable income for the year may raise your modified adjusted gross income (MAGI), which could lead to higher Medicare IRMAA surcharges or increase the portion of your Social Security benefits subject to tax.

Let’s take a look at several examples. First, let’s assume that you are 45, still working and facing $15,000 in unexpected medical bills. You decide to cash out part of your 401(k):

• Early distribution: At 45, the withdrawal is subject to the 10% penalty unless you qualify for an exception. Medical expenses above 7.5% of AGI can qualify, but only that portion avoids the penalty.
• Penalty calculation: $15,000 × 10% = $1,500.
• Federal income tax: Added to your taxable income. At a 22% bracket, $15,000 × 22% = $3,300.
• State tax (if applicable): Example 5% rate = $750.
• Net effect: After taxes and penalty, you might only receive $8,500–$10,500, leaving you short of the $15,000 you need.
• Alternative: Instead of cashing out, you could consider a personal loan or 401(k) loan, if your plan offers one.

Now, let’s consider another example: you’re 62, still working and want to reduce your 401(k) balance to avoid large required minimum distributions (RMDs) later. Your plan allows in-service withdrawals after 59½, so you move part of your balance into a Roth IRA.

• No penalty: At 62, withdrawals are not subject to the 10% penalty.
• Tax effect: The converted amount is taxed as ordinary income in the year of the rollover. For instance, a $50,000 Roth conversion in the 22% bracket = $11,000 in federal tax.
• Roth IRA benefits: Once inside the Roth, funds grow tax-free, withdrawals in retirement are tax-free (if qualified), and there are no lifetime required minimum distributions (RMDs).

No. Some 401(k) plans do not permit any in-service withdrawals. Check your Summary Plan Description or ask your HR department.

Yes, if your plan allows in-service distributions, you can typically withdraw penalty-free after age 59½, though taxes still apply.

You typically have until the tax filing deadline of the following year to repay the loan. If you don’t, the remaining balance is treated as a distribution and taxed (plus penalties, if applicable).

Cashing out your 401(k) while still employed is technically possible in certain circumstances, but it’s rarely the best financial decision. Between taxes, penalties, and lost retirement growth, the true cost can be far higher than expected. Before you tap your retirement account, review your plan rules, consider less damaging alternatives, and weigh the long-term impact on your retirement goals.

• A financial advisor can help you compare all your options, evaluate the tax consequences and design a withdrawal strategy that protects your financial future. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• SmartAsset’s Social Security calculator can help you estimate future monthly government benefits.

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