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Created: October 21, 2020
Modified: October 19, 2023

Episode 16: Can I Withdraw From My 401(k)?

Thank you for joining us for Episode 16 of our Money Wisdom Question Series, where we film answers to common financial and retirement investment questions. Today’s question is “Can I withdraw money from my 401(k)?”

There are different reasons to make a withdrawal from a 401(k), including:

  1. Taking the money out to spend it (taxable event)
  2. A rollover (non-taxable event)

A Withdrawal and You’re No Longer Working for the Same Employer

If you are no longer working where you had that 401(k), 403(b), or 457 (depending upon who your employer was) you have the ability to roll that money into a traditional individual retirement account (IRA). If you choose to do this, it’s not a taxable event. Why would you roll that money into an IRA? In that IRA, you can invest in anything that you want. Whereas in a 401(k), you have a fairly short list of what you can invest in.

Now, as with anything, not everyone should do this. It’s very specific to your situation, your 401(k), and what you’re trying to accomplish. Just know that if you’ve left the employer, you don’t have to leave the money there, although sometimes you should.

A Withdrawal From Your 401(k) While You’re Still Working

If you’re still working and of a certain age, sometimes that age is 55, 50, or 59 ½, you have something known as an in-service withdrawal available to you. This allows you to continue to work at that employer and save money into that plan but allows you to take other money out of that plan and roll it into an IRA. You do this to gain access to more without paying taxes and usually without paying a fee.

A Withdrawal to Spend Money

In terms of a true withdrawal (when you take money out to spend it), when you are over the age of 55 and no longer working for that employer, there may be options for you. You may be able to draw out money without the IRA penalty, which normally would apply any time before age 59 ½. If you’re not 59 ½ years old and you draw money out, you’re paying all the taxes plus a 10% penalty. You really don’t want to do that, but yes life happens, which brings up a hardship withdrawal. This allows you to waive the penalty for certain things. It might be a health-related issue or a first-time home purchase.

Consider Your Long-Term Financial Goals

There are many different options when accessing money from your 401(k). What you need to always be thinking about is that money is the money you will live on for the rest of your life. If you’re withdrawing it during working years, it won’t be there during your retired years, which is when you very well might need it the most.

Like many things that we talk about, this is very dependent upon your individual situation. There are a lot of options and before doing anything, make sure that you’ve gotten some advice and input. Think about how a withdrawal or rollover would impact your long-term financial plan and what you’re trying to accomplish.

Thanks for joining me and I hope you found this information helpful!

P.S. If you enjoyed this topic and want to learn more, get our free retirement book, “The Ultimate 401(k) Guide“.

P.P.S. Feel free to submit questions here for a chance to have them answered!

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