Taking money out of a 401(k): What are my options?
Cashing out a 401(k) or taking a hardship withdrawal permanently removes money from the account and may be subject to income tax and, in some cases, an additional 10% tax. A 401(k) loan generally isn’t taxable when it meets federal and plan requirements, but it must be repaid on schedule. Rolling over a 401(k) to a retirement account is another option and has its own set of rules.
Taking money out of a 401(k) can provide access to cash, but the method matters. A 401(k) loan lets you borrow from your account and requires repayment. A withdrawal pays money out of the account as a distribution and is not repaid. A rollover moves eligible retirement funds to another retirement account.
Your employer’s 401(k) plan may not offer every option. A plan may choose whether to offer participant loans or hardship distributions and its rules may be more restrictive than federal limits. Federal rules also generally limit distributions until a permitted event occurs, such as leaving a job, reaching age 59½, certain plan terminations or financial hardship. Review your Summary Plan Description and contact your plan administrator before making a request.
401(k) loan, withdrawal and rollover differences
The following comparison chart provides a quick look at the primary differences between borrowing from a 401(k), taking a withdrawal and completing a rollover.
401(k) loan
You borrow from your vested account balance if the plan permits loans
Yes
Generally not taxable when federal and plan rules are followed; an unpaid balance may be treated as a taxable distribution
Cashing out a 401(k)
You receive money from the account as a cash distribution
No
The taxable amount generally is included in income and an additional 10% tax may apply
401(k) hardship withdrawal
You receive a distribution for an immediate and heavy financial need if the plan permits it
No
Generally taxable; an additional 10% tax may apply; not eligible for rollover
Direct 401(k) rollover
Eligible funds move directly to another retirement plan or an Individual Retirement Account (IRA)
Not applicable
Eligible pre-tax funds generally remain tax-deferred when moved to an eligible pre-tax account
These are general federal rules. The result can vary based on the type of money in the account, the plan’s terms and your tax circumstances.
Tax treatment can differ for designated Roth money. Roth contributions are made with after-tax money, while qualified Roth distributions are generally excluded from gross income. If the plan permits an in-plan Roth rollover, previously untaxed amounts are generally included in gross income for the year of the rollover.
How borrowing from a 401(k) works
Borrowing from a 401(k) does not require demonstrating a financial hardship. If your plan permits loans, you apply under the plan’s procedures and agree to its repayment terms.
Review the loan agreement carefully. It may explain the interest rate, payment amount, repayment period, payment method and applicable plan fees. Consider how the required payment could affect your take-home pay and monthly budget. Borrowing may also reduce potential account earnings while the loan is outstanding.
How much can you borrow from a 401(k)?
Federal 401(k) loan limits generally restrict the total outstanding loan balance to the lesser of:
- $50,000
- 50% of your vested account balance
If 50% of your vested balance is less than $10,000, a plan may permit a loan of up to $10,000, but it is not required to offer this exception. The $50,000 limit may also be reduced if you had an outstanding loan from this plan or another plan maintained by your employer or a related employer during the 12-month period ending the day before the new loan.
How 401(k) loan repayment works
Under federal 401(k) loan repayment rules, a general-purpose loan generally must be repaid within five years. Payments must be substantially equal, include principal and interest and be made at least quarterly.
A loan used to purchase your principal residence may qualify for a repayment period longer than five years.
Do you pay taxes on a 401(k) loan?
A 401(k) loan generally is not taxable when it stays within permitted limits and is repaid according to the plan’s terms.
If a loan exceeds the permitted amount, the excess portion generally is treated as a taxable distribution. If the loan isn’t repaid according to its terms, the outstanding balance generally is treated as a taxable distribution. If you’re younger than age 59½, the taxable amount may also be subject to an additional 10% tax penalty unless an exception applies.
What happens to a 401(k) loan when you leave a job?
The result depends on the plan’s terms. A plan may require repayment of the outstanding balance when employment ends or when the plan terminates.
If the plan reduces your account balance by the unpaid loan amount, the reduction is called a plan loan offset. A plan loan offset may qualify for an extended rollover deadline when it occurs solely because the plan terminates or because you fail to meet repayment terms due to separation from employment. For a separation-based offset to qualify, the loan generally must have met federal requirements immediately before you left and the offset must occur within 12 months after your separation.
A qualified plan loan offset generally may be rolled over by the federal income tax return due date, including extensions, for the year of the offset. To complete the rollover, you generally must contribute the offset amount from another source. Other eligible plan loan offsets generally have a 60-day rollover period. Contact the plan administrator and a tax professional promptly because the deadline depends on the reason and timing of the offset and the loan’s prior status.
What happens when you cash out your 401(k)?
Cashing out your 401(k) means receiving money from the account instead of leaving it in the plan or moving eligible funds to another retirement account. It is also different from a plan loan. The distribution is not repaid and the account balance is reduced by the amount of the distribution.
Before requesting a cash distribution, consider asking the plan administrator about:
- Gross distribution: the amount before withholding
- Withholding: any federal or state tax expected to be withheld
- Estimated payment: the amount expected to be paid to you
- Rollover eligibility: whether the distribution may be rolled over
The amount withheld from a distribution may not equal your final federal or state tax liability.
Taxes on a 401(k) withdrawal
The taxable portion of a 401(k) withdrawal generally is included in gross income for the year of the distribution.
A taxable distribution received before age 59½ may also be subject to an additional 10% tax penalty unless an exception applies. The additional tax penalty applies to the portion of the distribution that is included in gross income.
Withholding depends on the type of distribution. The mandatory 20% withholding rule discussed later applies specifically to taxable eligible rollover distributions from employer-sponsored retirement plans that are paid to you.
How a 401(k) early withdrawal may affect retirement savings
Taking a withdrawal reduces the amount remaining in the account and the amount available for potential future growth. The long-term effect can depend on the amount withdrawn, the time remaining before retirement, future contributions and account performance.
Consider using a retirement savings calculator to compare different starting balances, contribution amounts and retirement dates.
What to know about a 401(k) hardship withdrawal
A 401(k) hardship withdrawal, called a hardship distribution by the IRS, is different from a loan. A plan may permit a hardship distribution when there is an immediate and heavy financial need and the amount generally must be limited to what is necessary to meet that need.
Expenses that may qualify for a hardship withdrawal
The plan’s terms determine which circumstances it recognizes. Potential qualifying hardship expenses may include:
- Certain medical expenses
- Costs directly related to purchasing a principal residence, excluding mortgage payments
- Tuition, related fees and room and board for certain postsecondary education
- Payments needed to prevent eviction from or foreclosure on a principal residence
- Certain funeral or burial expenses
- Certain expenses to repair damage to a principal residence
- Certain expenses and losses related to a federally declared disaster
The disaster provision generally applies when, at the time of the disaster, your principal residence or principal place of employment was in an area designated by the Federal Emergency Management Agency (FEMA) for individual assistance.
Hardship withdrawal rules and potential taxes
Current IRS hardship withdrawal rules include the following:
- Repayment: A hardship distribution is not repaid to the plan.
- Account balance: The distribution reduces your account balance.
- Rollover: A hardship distribution cannot be rolled over to an IRA or another qualified plan.
- Future contributions: A plan may not suspend your elective contributions solely because you took a hardship distribution.
The taxable portion of a hardship distribution generally is included in income. An additional 10% tax penalty may also apply to an early distribution unless you qualify for a separate exception.
How a 401(k) rollover differs from cashing out
A direct rollover moves eligible funds directly from the 401(k) to another eligible employer plan or an individual retirement account. When eligible pre-tax money moves directly to another eligible pre-tax account, current federal income tax generally is deferred and mandatory withholding does not apply.
When a taxable eligible rollover distribution from an employer-sponsored retirement plan is paid to you, 20% federal income tax withholding generally applies, even if you intend to roll over the money later. This is withholding, not necessarily your final tax liability.
You generally have 60 days after receiving an eligible distribution to complete a 60-day rollover. To roll over the full eligible distribution, you generally must replace the amount withheld using money from another source. Any taxable amount that is not rolled over may be included in income and may be subject to the additional 10% tax penalty.
Questions to consider before taking money out of a 401(k)
The following questions may help when comparing a loan, withdrawal and rollover:
Does your plan permit the option?
Plans may limit or exclude loans and hardship withdrawals
Can a loan payment fit your budget?
Required payments may reduce take-home pay
Could you leave your job before repayment ends?
Employment changes may affect repayment and rollover timing
How much cash would you receive?
Withholding can reduce the amount paid to you
How could a smaller balance affect your goal?
A withdrawal reduces the amount available for potential future growth
Are other funding options available?
Comparing costs, repayment terms and tax effects can clarify tradeoffs
Review your plan documents, current budget, emergency savings and retirement timeline before making a request.
Frequently asked questions about 401(k) loans and withdrawals
Does a hardship withdrawal automatically avoid the additional 10% tax?
No. Meeting your plan’s requirements for a hardship withdrawal and qualifying for an exception to the additional 10% tax penalty are separate issues. The taxable portion of the distribution may still be subject to the additional tax penalty unless an IRS exception applies.
Can you have more than one 401(k) loan?
Possibly. Your plan may permit more than one outstanding loan, but the combined balance must remain within federal and plan limits. A loan balance from the previous 12 months may also reduce the amount available for another loan.
Can you repay a 401(k) loan early?
Possibly. Your plan may permit early repayment, but repayment methods and requirements can vary. Review the loan agreement or contact the plan administrator for details.
Choosing between a 401(k) loan, withdrawal and rollover can depend on plan terms, cash needs, repayment ability and tax circumstances. Review your plan documents and contact the plan administrator before making a request. A tax professional can help explain how federal and state tax rules may apply. For help exploring retirement options beyond your employer’s plan, contact a local State Farm agent.
This content was developed with the help of AI and reviewed by State Farm editors.
The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
Neither State Farm nor its agents provide tax or legal advice.
Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.
