A 401(k) is designed for retirement savings, so you’ll often face IRS penalties if you withdraw funds before age 59 1/2. In addition to a potentially hefty tax bill, your money will miss out on the potential to grow since it’s no longer invested.
We’ll take a deep dive into 401(k) withdrawals and 401(k) loans in this article. You’ll learn the rules and the differences between withdrawals and loans, as well as how a 401(k) loan or withdrawal can affect your retirement planning.
Learn more: What is a 401(k)? A guide to the rules and how it works.
A 401(k) withdrawal is when you permanently remove money from your workplace retirement account.
Once you reach age 59 ½, you’re generally allowed to make penalty-free withdrawals from many retirement accounts, like 401(k)s and 403(b)s. But if you withdraw money early, you’ll often get hit with a 10% penalty in addition to taxes.
The rules for withdrawing money from a 401(k) vary, depending on whether you have a traditional 401(k), which is funded with pre-tax dollars, or a Roth 401(k), which you fund with after-tax dollars.
Learn more: How much should I contribute to my 401(k)?
A traditional 401(k) is funded with pre-tax money, which means that your contributions lower your taxable income for the year. However, any withdrawals you make are taxable as ordinary income, regardless of your age. A 10% early withdrawal penalty will also apply in most circumstances if you haven’t reached age 59 ½.
Though you can technically withdraw all your 401(k) funds at once without penalty once you’ve celebrated that milestone half-birthday, doing so is typically ill-advised, particularly if you have a traditional 401(k). Since your withdrawals are treated as ordinary income, you’d likely incur a large tax bill. For example, if you withdrew $200,000 from your 401(k) to pay off your mortgage, you’d have an additional $200,000 in taxable income.
Traditional 401(k)s are also subject to mandatory withdrawals called required minimum distributions (RMDs) once you reach age 73, though the RMD age will increase to 75 in 2033 under Secure Act 2.0 rules.
A Roth 401(k) is funded with money you’ve already paid taxes on, but it offers the potential for tax-free withdrawals in retirement. You’ll generally need to be at least 59 ½ AND hold the account for at least five years before you can make tax- and penalty-free withdrawals.
If you withdraw money early from a Roth 401(k), you’ll owe taxes and penalties on the earnings portion of the balance. Let’s say you have a $50,000 balance and that 60%, or $30,000, is attributed to contributions, while the other 40%, or $20,000, is earnings. The IRS assumes early Roth 401(k) withdrawals have the same composition as the account. So, if you took a $5,000 early withdrawal, you’d owe taxes and a penalty on 40% of the withdrawal ($2,000) that’s attributed to earnings.
Unlike traditional 401(k)s, Roth 401(k)s are no longer subject to RMDs. You can let the money grow indefinitely without taking a withdrawal during your lifetime.
An early 401(k) withdrawal is generally defined as a distribution you take before age 59 ½. In addition to regular income taxes on the distribution, you’ll often owe a 10% early withdrawal penalty.
If you withdraw money early from your 401(k) or cash it out altogether, your plan administrator is required to automatically withhold 20% for taxes. But the mandatory withholding may not be sufficient to pay the entire tax bill, which means you could owe more money when you file your return.
There are a few instances where you may be able to avoid the 10% penalty, including:
Hardship withdrawals: If you have what the IRS calls “an immediate and heavy financial need,” you may be able to take a hardship distribution. Some examples of expenses that may qualify include medical bills, funeral costs, tuition and related expenses, and losses stemming from a natural disaster.
Rule of 55: Under the rule of 55, you can take 401(k) distributions without paying a 10% penalty if you leave your job in the calendar year you turn 55 or later. If you’re a public safety worker, you get an extra five years, so you can take penalty-free withdrawals if you leave your job the year you turn 50 or later. However, the rule of 55 only applies to the 401(k) plan you were contributing to at the time you left your job.
Substantially equal periodic payments (SEPP): If you’re younger than 59 ½, you can avoid the 10% penalty if you set up a series of substantially equal periodic payments, which are regular withdrawals from a retirement account over at least five years. Calculating distributions and complying with IRS requirements can get complicated, so consult with a tax advisor.
Other exceptions: There are a few other circumstances where you may be able to avoid the 10% penalty. For example, the Secure Act 2.0 allows for penalty-free emergency withdrawals of up to $1,000 per year for those dealing with what the IRS calls an “emergency personal expense.” You may also have the penalty waived on early distributions of up to $10,000 if you’re a domestic violence survivor or you’ve been diagnosed with a terminal illness. Beginning in 2026, you’ll also be allowed penalty-free withdrawals up to $2,500 to pay for long-term care insurance.
A 401(k) loan is when you borrow money from your retirement account and then repay the full amount, plus interest. Employers’ rules vary, but you can often withdraw up to 50% of your vested balance or $50,000 — whichever is less. But if your vested balance is $10,000 or less, you may be allowed to borrow up to the full balance.
One big advantage of a 401(k) loan is that, unlike with an early withdrawal, you can avoid taxes and penalties. Also, unlike most loans, a 401(k) loan doesn’t require a credit check.
You’ll need to repay the principal plus interest for most 401(k) loans within five years, assuming you continue working for your employer. Your payments are usually taken out automatically from each paycheck, which makes things convenient.
Learn more: How a 401(k) match works and why you should seek it out
One of the big risks of a 401(k) loan is that if you leave your job for any reason, the repayment timeline is expedited.
There are a few more drawbacks to consider before taking a 401(k) loan.
“Apart from the immediate effect of taking a loan or withdrawal, consider that some plans may not allow you to contribute while you have an outstanding loan,” said Brandon Renfro, CFP and owner of Belonging Wealth Management in Longview, Texas. “Not only will you miss out on additional savings, but you’ll forgo the match those contributions would have received as well.”
Because of the potential penalties and lost earnings, taking money out of your 401(k) should be reserved as a last resort. Before you turn to your 401(k) for money, consider these alternatives:
Savings account: If you have money set aside in a savings account, this is typically your first option for a major expense. A high-yield savings account is a good place to keep money for emergencies and short-term goals.
Roth IRA: You can withdraw your Roth IRA contributions at any time without owing taxes or a penalty. However, if your withdrawal includes any earnings, that portion will be subject to taxes and penalties if you’re younger than 59 ½ or the account is less than five years old. Suppose you have a Roth IRA with a $20,000 balance. Of that, $12,000 is money you contributed, while the other $8,000 is earnings. If you withdrew $15,000 from your Roth IRA, the $12,000 of contributions would be tax- and penalty-free. But if you’re younger than 59 ½ or you opened the account less than five years ago, you’d likely owe taxes and a 10% penalty on the $3,000 worth of earnings. Unlike early Roth 401(k) withdrawals, early Roth IRA withdrawals assume that contributions are taken first, then funds converted from a traditional IRA, and then earnings.
Health savings account (HSA): If you’re facing large medical bills for yourself, your spouse, or a dependent, consider tapping your HSA. Withdrawals are tax- and penalty-free as long as they’re used for qualifying medical expenses.
Tap your home equity: If you own your home, consider whether you could borrow against your equity through a home equity line of credit (HELOC) or home equity loan. Many lenders will require at least 15% to 20% equity and good credit.
Personal loan: A personal loan allows you to borrow money in a lump sum and repay it in fixed monthly installments. Typical loan terms range from one to seven years.
Credit card: Though credit cards typically come with high APRs, you can avoid paying interest with a 0% APR credit card if you charge an expense and pay off the balance before the promotional period ends.
Learn more: HSA contribution limits: Here’s how much you can save
Let’s assume you’ve explored the alternatives and concluded that taking money from your 401(k) is your only option. In that case, is it better to go with a 401(k) withdrawal or 401(k) loan?
“If you intend to pay it back, a loan may be a better option,” Renfro said. “However, make sure you think about the effect that the payments will have on your budget going forward. If you can’t comfortably cover them, you may find yourself in an even tighter position.”
Stacy Miller, CFP and founder of BayView Financial Planning in Tampa, Florida, also suggested choosing a 401(k) loan over a withdrawal in most situations. The interest you pay on the loan usually amounts to much less than you’d pay in taxes and penalties, and the interest ultimately goes back into your account.
Learn more: 401(k) vs. IRA: The differences and how to choose which is right for you
“One of the most important things to consider is the stability of your job,” Miller said. “The ability to pay back the loan within the allotted time hinges on continuous employment. If you lose your job, you could be required to pay back the loan very quickly, and if you cannot pay it back, you will get hit with taxes and penalties.”
If you do take a 401(k) withdrawal or loan, Miller suggests starting to invest again as soon as possible — and as much as possible. People aged 50 and above qualify for higher 401(k) contribution limits. In 2025, you can contribute an extra $7,500 if you’re between the ages of 50 and 59, or you’re 64 or older. If you’re between the ages of 60 and 63, you can contribute an additional $11,250. In 2026, you can contribute an extra $8,000 in your 50s and after your 64th birthday. The additional $11,250 contribution for savers aged 60 to 63 remains the same in 2026.
Learn more: Find my 401(k): How to recover and roll over forgotten funds
No, 401(k) loans aren’t reported to the credit bureaus, so they have no effect on your credit score. If the loan goes into default, you could wind up with a significant tax bill, but the default still isn’t reported to the credit bureaus.
If you cash out your 401(k) before age 59 1/2, your plan administrator is usually required to withhold 20% for taxes, so if you had a $50,000 balance, you’d receive $40,000. Depending on your tax rate and whether the 10% early withdrawal penalty applies, you could owe additional taxes.
Yes, you can withdraw money from your 401(k) to pay off debt, but doing so usually isn’t recommended. You’ll typically owe taxes and a penalty if you’re younger than 59 ½, plus you’ll have reduced earnings due to lost time in the market.
Tim Manni edited this article.
