How Can I Get Money Out of My 401k Without Paying Penalties?

A 401k – or 401(k) – is a retirement savings account/investment tool that is widely available and pretty powerful under the right circumstances. You can use them to basically take pre-tax dollars, have them matched by your company (hopefully), and then invested in stocks, money market accounts, mutual funds, and bonds to grow over time.

The end result, ideally, is that your pre-tax dollars have accumulated month after month, year after year, until – with the power of compound interest – you have a nice nest egg ready for your retirement.

For this reason, over 50 million Americans have a 401k, with assets over $2.8 trillion. Those numbers have dropped somewhat as individual retirement accounts (IRAs) have become more popular, but they are still quite robust. Of course, even though there are advantages to using a 401k, there are disadvantages: you can’t touch your money until the age of 59 ½ – otherwise, you’ll pay a steep penalty.

That is bad news for many people who need access to their money well before they reach that magical age. In this article, I’ll talk about how you can get money out of your 401k without paying penalties.

What You’re Up Against: Penalties

First, we’ll take a look at the 401k withdrawal requirements and limitations and discuss the penalties for jumping the gun and raiding the account before it’s time to do so.

I’ll start by saying that you can withdraw money from your 401k at any time. It’s your money, after all; you have the right to pull your funds or even take out loans against them (more on that later). When you do, though, you not only have to pay taxes on your withdrawals; you also have to pay penalties.401k

These penalties can be pretty steep. If you withdraw money early, it is subjected to what is called an excise tax, which in this case is equal to 10% of how much you are withdrawing. In other words, expect to lose 10% of the taxable amount instantly, plus any income taxes you have to pay on the withdrawal.

No one wants to lose a 10% chunk of their hard-earned investment, which is why most people leave their 401k plans untouched until they come of age. But, sometimes you need access to the money for emergency funds.

Fortunately, there are ways to access it without penalty.

Avoiding Paying Penalties on Your 401k

There are certain exemptions that could keep you from paying the 10% early-withdrawal penalty. These are called hardship exemptions and give you a way out – provided you meet the criteria. Hardship exemptions include:

  • Death of the plan participant (which doesn’t help you but could help your family)
  • You become permanently disabled
  • You had to pay out of pocket for medical expenses that exceed 7.5% of your adjusted gross income
  • You were forced to disburse funds by a court order following a divorce or separation
  • You are over the age of 55 and retired or left your job
  • You are leaving your place of employment and scheduled a payment schedule that gives you money in equal payments over the course of your life expectancy

Those are the hardship exemptions – and the IRS is very strict when it comes to giving them out. Basically, this isn’t for buying a new house (something that’s allowed under an IRA), or a new boat, or putting someone through college, or fixing up your home. This is an emergency measure and you have to demonstrate real need – not only to the federal government but also to your employer, who may have additional withdrawal guidelines you have to follow.

If you are met with an immediate and severe financial burden, without any other way to pay for these expenses, you may qualify; if not, you’ll have to pay a penalty.

The other option to get money from your 401k is to take out a loan against the balance. You have to pay back this amount, naturally, but the good news is that you can avoid a penalty. You do have to pay interest and fees, but you’re really paying interest to yourself. Taxes, though, may not be avoidable.

Repayment for these loans occurs over a five-year time period. So, if you can pay them back, taking out a loan to access your cash in the event of an emergency may not be a bad idea. Keep in mind interest and fees, though. Plus, if you happen to quit your job or be fired or laid off while a loan is active, the full amount is due within 60 days.

Taking out a loan or meeting one of the criteria for hardship withdrawals are really the only two ways you can get money from your 401k without having to pay the 10% penalty.

You may also be interested in these 401k posts:

Calculating 401k Early Withdrawal Penalties

Where Can I Put My 401k Rollover to Gain Maximum Returns?

Where Should I Invest My 401k?

How Much Can I Contribute to My 401k Per Year?

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28 Responses to “How Can I Get Money Out of My 401k Without Paying Penalties?”

  1. I lost my job six months ago and only have about $800 left on unemployment, have looked for a job passionately on a daily basis with no luck, am a single mother and still must provide for my teenage daughter. I dont have much choice, can I justify this as an emergency? I only want to take out a small loan on it, can I do so as Im jobless or my only option to take it out without it being a loan?

    • I plan to withdraw my 401k when I turn 59 1/2 years old, will I pay taxes and will I be penalized? At what age will there be no taxes when you withdraw it?

      • After 59 1/2, there is no early distribution penalty but you would still pay Federal income taxes and State income taxes (if applicable).

        There is no age that there will be no taxes. At 70 1/2 you have to start taking distribution and pay taxes on the distribution.

        The key is to not take a distribution, but instead, roll over your money into other investments on a tax-deferred basis. For example, you can invest in your own business startup.

  2. Hi Sandy, Unfortunately, I think you would get charged a penalty for this. Would getting a loan be possible?

  3. I have been out of work for 1.5 years and filed for permanent disability but have not heard anything as of today. My 401 K has lost about 1000 since I transferred it over to ing. If I start withdrawing now at age 58, will I get a penalty?

  4. Hi Rick, sorry to hear about your situation. You may qualify for hardship and avoid penalties. Go for it, there’s nothing to lose!

  5. My wife is going to have to go on medical disability…60% of her salary…can we take out our 401k to cover the delta….

    • Hi Rick,

      If you have a permanent disability and need money to survive, I think you would qualify. Good luck with it and let know how you get on.


  6. I just got divorced and got half of my wife’s 401k.I am 10% disabled as a firefighter but don’t know what documentation is required to prove I am diabled.Would I qualify for hardship withdrawal? If so i would still have to pay the taxes right?I gave up on social security disability claim,and need to work but would like to buy A forclosure with the 401k money.Can you help me?

    • Hi Paul,

      Is your disability permanent? If you can show them your disability is preventing you working and this is causing you real hardship, I think you would have a good chance of qualifying. In this situation, I think you’d avoid the 10% penalty.


  7. I am thinking of quitting my job and moving to another state, my husband has medical bills THIS year that are more than 7.5% of my income, and he doesn’t have a job due to disability but this can’t be proven and no doctor will say it is permanent. If I wanted to cash out my 401k in say March of 2013, will the medical bills from this year count as hardship or will it have to be from 2013?

  8. Hi Angabange, As far as I know, you could do it for this year.

  9. I am 55 and will be laid off from my job of 20 yrs. I am thinking about just retiring. I was told I can withdrawal from my 401k but I have to take out the same amount every yr for 5 Yrs. can I just take out what I need 1 time and leave it alone until I am ready to start accessing it

  10. My employer has a 401 that i don’t pay into but I was wandering if I could get 1/2 of my 401 put into my wife’s name since she is disabled and we spent here 401. I would think that she would be entitle to 1/2 of my 401 k and since she is disabled she would qualify for withdrawal but I would need a court order.

  11. I am currently in college and will need to quit my job due to class load. I have a 401K that I am fully vested in, my question is this, is it possible to take part of the 401K money as a cash out and roll the remainder into an existing IRA? I realize the tax and penalties for cashing out 401K funds.

  12. I have an immediate dental need that is requiring me to pay $9000.00 to get done. I have already taken a loan earlier in 2012 and a hardship withdrawal because my wife lost her job and we needed the money to basically survive. I now have this need but the JP Morgan associate said I had no money left to withdraw because I had already taken a loan and a hardship. I have $80,000 in the 401K, is there any other way to get any money from the account?

  13. I plan to withdraw my 401k when I turn 59 1/2 years old, will I pay taxes and will I be penalized? At what age will there be no taxes when you withdraw it?

  14. my husband is retiring at 63 he wants to roll his 401k over into a IRA with the option to have monthly withdrawls to offset early retirement can he do that without paying a penalty

  15. At 55 years old, I was laid off in Dec of 2012 after 16 years.
    About 20 months prior I had been reduced to part time. I was not awarded unemployment, awarded food stamps,and expects to be a homeless Vet shortly.
    A friend moved in to assist me as she is able. Any advice is welcome. Thanks for your time, email me at { email removed so you dont get tons of junk }

  16. I recently lost my job and have just started receiving unemployment. I’ve considered taking monies out of my 401K/stock to pay off a few bills. If I do take money out of my 401k to pay off bills will this terminate my unemployment benefits? I’m in NC if that makes a difference.

    Thank you for your feedback.

    • I don’t think u’d lose them, but you may not qualify for hardship. Getting a low interest loan to cover it may be an alternative for you.

  17. Hi My wife and I are both unemployed and are worried about losing our home with only 10 years left. we think taking from our 401k to secure our home makes sense since we are still young enough to recoupe our funds hopefully?? when we do finally find jobs. Is this hardship enough to avoid the 10 percent penalty?

  18. I have a really unique status I’m hoping you can advice. I used to be a US employee, and am now working in Israel and none of the US benefits apply to me. I can’t contribute to my 401K at all, my company is saying they won’t give me the money as the Israel group is an entity of the main company. 401K company is saying if you can’t contribute why does the company have you listed as active? You shouldn’t be active if you can’t participate in the plan. Is it legal for my company to list me as active on this 401K when I don’t reside at all in the US anymore? I don’t care about the tax aspect as I’m exempt from taxes due to living abroad.

  19. I was diagnosed with cancer in August and finished chemo in early January. I am scheduled to return to work march 30th. My disability runs out feb 24 th and march 3 rd . My healthcare is under my husband who left the night before I started chemo I will be covered until the end of march ( he has since lost his job) my Employer is making me wait 3 months until I can get coverage. I turned 55 in September Can I take money out of my 401k to pay for my cobra payment without being penalized for April. After starting back to work I will have to wait a while till I get a pay check and can not put the entire check out for healthcare , but iny situation I can medical coverage .

  20. My husb had ira and 401k built solely during marriage. During divorce proceeding he cashed out all even though court ordered to split 50-50, but. Also walked away from lucrative practice that was ordered s old and split as above.was partner with one. Other provider but also now partner has writ of attachment on home as he embezelled95k. Before leaving.I am disabled.was counting on retirement and house proceeds not to mention unpaid child support.what can I do about ira401 does it take both signatures to withdraw when you are still married

  21. Hi, I am 52,disabled, and on disability. Can I withdraw enough money to pay off my home and avoid the penalties? Thank you

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