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In-service withdrawals from 401(k) plans


Most people are familiar with the rules for putting money into a 401(k) plan, but they may not be familiar with the rules for taking money out. Federal law limits the withdrawal options that a 401(k) plan can offer, but a plan itself may offer fewer withdrawal options than the law allows. It may even provide that you can’t take any money out until you leave employment. However, many 401(k) plans offer more flexibility.

Consider a plan loan

Many 401(k) plans allow you to borrow money from your own account. A loan may be an attractive option if you don’t qualify for a withdrawal, if you don’t want to incur the taxes and penalties that may apply to a withdrawal, or if you don’t want to permanently deplete your retirement assets. In addition, you must take any available loans from all plans maintained by your employer before you become eligible to withdraw your own pretax or Roth contributions from a 401(k) plan because of hardship.

In general, you can borrow up to one half of your vested account balance (including your contributions, your employer’s contributions and earnings), but not more than $50,000.

You can borrow the funds for as long as five years, longer if the loan is to purchase your principal residence. In most cases, you repay the loan through payroll deductions, with principal and interest flowing back into your account. But keep in mind that when you borrow, the unpaid principal of your loan is no longer in your 401(k) account working for you.

Withdrawing your own contributions

If you’ve made after-tax (non-Roth) contributions, your 401(k) plan can allow you to withdraw those dollars — and any investment earnings on them — for any reason, at any time. You can withdraw your pretax and Roth contributions (your elective deferrals), however, only for one of the following reasons, and again, only if your plan specifically allows the withdrawal.

  • You attain age 59½.
  • You become disabled.
  • The distribution is a qualified reservist distribution.
  • You incur a hardship and qualify for a hardship withdrawal

Hardship withdrawals are allowed only if you have an immediate and heavy financial need, and only up to the amount necessary to meet that need. In most plans, you must require the money to:

  • Purchase a principal residence or repair a principal residence damaged by an unexpected event, such as a hurricane
  • Prevent eviction or foreclosure
  • Pay medical bills
  • Pay certain funeral expenses
  • Pay certain education expenses
  • Pay income tax and/or penalties due on the hardship withdrawal itself

Investment earnings are not available for hardship withdrawal, except for certain pre-1989 grandfathered amounts.

In addition to the tax consequences described below, there are other disadvantages to hardship withdrawals. You can’t take a hardship withdrawal at all until you’ve first withdrawn all other funds, and taken all nontaxable plan loans, available to you under all retirement plans maintained by your employer. And, in most 401(k) plans, your employer must suspend your participation in the plan for at least six months after the withdrawal, meaning you could lose valuable employer matching contributions. Finally, hardship withdrawals can’t be rolled over, so think carefully before choosing this option.

Withdrawing employer contributions

Getting employer dollars out of a 401(k) plan can be even more challenging. While some plans won’t let you withdraw employer contributions at all before you terminate employment, others are more flexible and allow you to withdraw at least some vested employer contributions before then. “Vested” means that you own the contributions and they can’t be forfeited for any reason. In general, a 401(k) plan can allow you to withdraw vested company matching and profit-sharing contributions if:

  • You become disabled.
  • You incur a hardship, but your employer has some discretion in how hardship is defined for this purpose.
  • You attain a specified age, such as 59½.
  • You participate in the plan for at least five years.
  • The employer contribution has been in the account for a specified period, generally at least two years.


Your own pretax contributions, company contributions and investment earnings are subject to income tax when you withdraw them from the plan. If you’ve made any after-tax contributions, they will be nontaxable upon withdrawal. Each withdrawal you make is deemed to carry out a pro-rata portion of taxable and any nontaxable dollars.

Your Roth contributions, and investment earnings on them, are taxed separately; if your distribution is “qualified,” then your withdrawal will be entirely free from federal income taxes. If your withdrawal is “nonqualified,” then each withdrawal will be deemed to carry out a pro-rata amount of your nontaxable Roth contributions and taxable investment earnings. A distribution is qualified if you satisfy a five-year holding period and your distribution is made either after you’ve reached age 59½, or after you’ve become disabled. The five-year period begins on the first day of the first calendar year you make your first Roth 401(k) contribution to the plan.

The taxable portion of your distribution may be subject to a 10 percent premature distribution tax, in addition to any income tax due, unless an exception applies. Exceptions to the penalty include distributions after age 59½, distributions on account of disability, qualified reservist distributions and distributions to pay medical expenses.

Rollover of non-Roth funds

If your in-service withdrawal qualifies as an “eligible rollover distribution,” you can roll over all or part of the withdrawal tax free into a traditional IRA or to another employer’s plan that accepts rollovers. In general, most in-service withdrawals qualify as eligible rollover distributions, except for hardship withdrawals and required minimum distributions after age 70½.

If your withdrawal qualifies as an eligible rollover distribution, your plan administrator will give you a notice (a 402(f) notice) explaining the rollover rules, the withholding rules and other related tax issues. If you don’t directly roll the funds over to another plan or to an IRA, your plan administrator will withhold 20 percent of the taxable portion of your eligible rollover distribution for federal income tax purposes.

You can also roll over, or convert, an eligible rollover distribution of non-Roth funds to a Roth IRA. And some 401(k) plans will allow you to make an in-plan conversion, allowing you to request an in-service withdrawal of non-Roth funds and have those dollars transferred into a Roth account within the same 401(k) plan. In either case, you’ll pay income tax on the amount you convert, less any nontaxable after-tax contributions you’ve made.

Rollover of Roth funds

If you withdraw funds from your Roth 401(k) account, those dollars can only be rolled over to a Roth IRA, or to another Roth 401(k)/403(b)/457(b) plan that accepts rollovers. Again, hardship withdrawals can’t be rolled over, so make sure you understand how a rollover will affect the taxation of future distributions from the IRA or plan. For example, if you roll over a nonqualified distribution from a Roth 401(k) account to a Roth IRA, the Roth IRA five-year holding period will apply when determining if any future distributions from the IRA are tax-free qualified distributions — you won’t get credit for the time those dollars resided in the 401(k) plan.

Be informed

You should become familiar with the terms of your employer’s 401(k) plan to understand your particular withdrawal rights. A good place to start is the plan’s summary plan description. Your employer will give you a copy of this description within 90 days after you join the plan.

Reprinted with permission by Steven D. Brett, president of Marcum Financial Services LLC.