Can I Cash Out My 401k While Still Employed

Withdrawing funds from your 401(k) while still employed is generally not advisable, as it can have significant financial consequences. Early withdrawals are typically subject to income tax and a 10% penalty fee. This penalty is waived if you’re age 59½ or older, or if the withdrawal is used for certain qualified expenses such as medical costs or higher education expenses. However, taking money out of your 401(k) before retirement can reduce your potential savings and investment earnings over the long term, as you lose out on the compounding effect of interest. It’s crucial to carefully consider your financial situation and retirement goals before making a decision to cash out your 401(k) while still employed.

Types of 401k Distributions

There are several types of 401k distributions, each with its own rules and tax implications. Here are some common types:

  • In-service withdrawals: These are withdrawals taken from your 401k while you are still employed by the company that sponsors the plan. In-service withdrawals are not allowed under all 401k plans, and they may be subject to a 10% early withdrawal penalty if you are under age 59½.
  • Hardship withdrawals: These are withdrawals taken from your 401k for certain financial emergencies, such as medical expenses or tuition costs. Hardship withdrawals are also subject to a 10% early withdrawal penalty if you are under age 59½, unless you can prove that the withdrawal is for a qualified hardship.
  • Loans: These are loans taken from your 401k, which you must repay with interest. Loans are not subject to early withdrawal penalties, but they may be subject to other fees and charges.
  • Rollover distributions: These are distributions taken from your 401k when you leave your employer or retire. Rollover distributions are not subject to early withdrawal penalties, but they may be subject to taxes if you do not roll them over into another qualified retirement account within 60 days.
Type of DistributionEligibilityTax Implications
In-service withdrawalsNot allowed under all 401k plans10% early withdrawal penalty if under age 59½
Hardship withdrawalsCertain financial emergencies10% early withdrawal penalty if under age 59½, unless for a qualified hardship
LoansNot subject to early withdrawal penaltiesMay be subject to fees and charges
Rollover distributionsWhen you leave your employer or retireNot subject to early withdrawal penalties

401k Loans and Withdrawals

While you’re still employed, you generally cannot cash out your 401k. However, there are two exceptions: loans and withdrawals.


You can borrow up to 50% of your vested 401k balance, or $50,000, whichever is less. The loan must be repaid within five years, unless it’s used to buy a primary residence.

401k loans have the following benefits:

  • You don’t have to pay taxes on the money you borrow.
  • You pay interest to yourself, so you can save money on interest charges.

However, 401k loans also have some risks:

  • If you leave your job, you may have to repay the loan immediately.
  • If you default on the loan, the money you borrowed will be taxed as income.


You can also withdraw money from your 401k while you’re still employed, but you’ll have to pay taxes and penalties on the money you withdraw.

The following are some of the reasons you may be able to make a withdrawal from your 401k:

  • You’re over 59 1/2 years old.
  • You’re leaving your job.
  • You’re becoming disabled.

The amount of money you can withdraw depends on your plan’s rules.

Withdrawal TypeAge LimitTaxes and Penalties
Substantially equal paymentsNoneTaxes on withdrawals, plus 10% early withdrawal penalty if under age 59 1/2
Series of substantially equal paymentsNoneTaxes on withdrawals, plus 10% early withdrawal penalty if under age 59 1/2
Age 59 1/2 lump sum59 1/2 or olderTaxes on withdrawals
DisabilityDisabledTaxes on withdrawals
DeathDeath of participantNo taxes or penalties

Tax Implications of 401k Cash Outs

Cashing out your 401k while still employed can have significant tax implications. Here’s what you need to know:

  • Income Tax: The amount you withdraw from your 401k is considered taxable income and will be taxed at your ordinary income tax rate.
  • 10% Early Withdrawal Penalty: If you are under age 59½ when you cash out your 401k, you will typically pay an additional 10% early withdrawal penalty. This applies even if you have a hardship or need to pay medical expenses.

Exceptions to the 10% Penalty

Under certain circumstances, you may avoid the 10% early withdrawal penalty:

* Age 55 or Older: If you are age 55 or older and leave your job, you can withdraw funds from your 401k without penalty.
* Disability: If you become disabled and unable to work, you can withdraw funds from your 401k without penalty.
* Medical Expenses: You can withdraw funds from your 401k to cover qualified medical expenses without penalty.
* Substantially Equal Periodic Payments: You can avoid the 10% penalty by taking substantially equal periodic payments (SEPPs) from your 401k.

Roth 401k Withdrawals

Withdrawals from a Roth 401k are generally not subject to income tax or the 10% early withdrawal penalty. However, if you withdraw earnings from a Roth 401k before age 59½, you may pay income tax on those earnings.

Table: Tax Implications of 401k Cash Outs

| Age | Withdraw Before Age 59½ | Withdraw After Age 59½ |
| Under 55 | Taxed at ordinary income tax rate plus 10% penalty | Taxed at ordinary income tax rate |
| 55 or Older | Taxed at ordinary income tax rate | No penalty |
| Disabled | No penalty | No penalty |
| Medical Expenses | No penalty | No penalty |
| SEPPs | No penalty | No penalty |
| Roth 401k | No income tax on contributions, tax on earnings withdrawn before age 59½ | No income tax or penalty |

Alternative Options to Cashing Out

Before you consider cashing out your 401k while still employed, consider these alternative options:

  1. 401k Loan: Borrow money from your 401k, typically at a low interest rate. You’ll have to repay the loan, but it can provide access to funds without penalty.
  2. Hardship Withdrawal: Withdraw funds from your 401k due to financial hardship, such as medical bills or housing expenses. However, it may trigger taxes and penalties.
  3. Personal Loan: Obtain a loan from a bank or credit union. While interest rates may be higher than 401k loans, you won’t have to pay penalties.
  4. Tax-Free Exchanges: Roll over your 401k funds into another retirement account, such as an IRA or a new employer’s 401k, without paying taxes.
  5. Emergency Savings Fund: Build an emergency savings fund to cover unexpected expenses and avoid dipping into your 401k.
    401k Loan– Low interest rates
    – Avoid penalties
    – Must be repaid
    – May reduce future 401k earnings
    Hardship Withdrawal– Access to funds for emergencies
    – Avoids penalties for qualified expenses
    – May trigger taxes and penalties for non-qualified expenses
    – Reduces retirement savings
    Personal Loan– Higher interest rates
    – May not qualify for low interest rates
    – No penalties or tax implications
    – Can be used for any purpose
    Tax-Free Exchanges– Preserve retirement savings
    – Avoid taxes and penalties
    – May have limited investment options
    – May not be available in all cases
    Emergency Savings Fund– Immediate access to funds
    – No penalties or tax implications
    – May take time to build up
    – May not be sufficient for all financial emergencies

    That’s all, folks! We hope you found this article helpful in navigating the tricky waters of 401k cash-outs. Remember, it’s not a decision to make lightly, so be sure to weigh your options carefully. Thanks for hanging out with us today! If you enjoyed this ride, be sure to drop by again soon for more financial wisdom. We promise to keep the jargon to a minimum and the humor at a maximum. Catch ya later!