Can I Cash Out My 401(K) Without Quitting My Job?

Cashing out a 401(k) may be tempting, especially if you’re facing financial difficulties or a significant medical emergency or repair. Most 401(k) participants only access their 401(k)s when they leave a job.

Normally you can't cash out your 401(k) without quitting your job. However, some plans allow participants to cash out their 401(k)s via a 401(k) loan or through a hardship withdrawal. A 401(k) loan will prevent you from having to pay taxes and penalties, but the loan plus interest will need to be repaid into the account. Hardship withdrawals are categorized by the IRS. You’ll still need to pay taxes; however, you’ll be exempt from the 10% penalty tax.

Retirement accounts are built and intended to help you save a nest egg to last throughout your retirement years. The best advice is to simply leave it to grow. But if you need access to your 401(k), it may not be necessary for you to quit your job to do so.

401(k) Loans

If you’re anticipating staying at your job for longer than five years, then perhaps a 401(k) loan is your best option to cash out your 401(k). The only thing to be aware of is defaulting on the loan. It won’t affect your credit if you’re fully vested; however, the IRS will view your defaulted 401(k) loan as income and tax you accordingly. They will also consider the loan as an ineligible withdrawal and issue you a 10% penalty tax.

401(k) loans are capped at $50,000 or 50% of your 401(k) balance, whichever is less. Most 401(k) loans process within a couple of business days, with funds reaching a bank account a couple of days after that.

The loan must be repaid within five years. Although legislation was passed due to the COVID-19 pandemic has extended this timeline. It’s best to check with the current regulations to know how long you have to repay your 401(k) loan.

Lastly, should you quit your job or get fired with an outstanding 401(k), your employer may require to repay the balance in full within 60 days.

Hardship Withdrawals

Many plans allow participants to take out hardship withdrawals. Categorized by the IRS, hardship withdrawals allow 401(k) participants to cash out their 401(k)s in order to fund challenging or life-changing events.

Luckily, those who qualify for hardship withdrawals are spared the 10% penalty tax by the IRS. However, standard income tax will still be applied come tax time via a 1099.

The IRS defines hardship withdrawals as a distribution that is:

• Due to an immediate and heavy financial need.
• Limited to the amount necessary to satisfy that financial need.

Additionally, the IRS automatically categorizes a hardship withdrawal through the Safe Harbor regulations:

• Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
• Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
• Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents, or beneficiary.
• Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
• Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
• Certain expenses to repair damage to the employee’s principal residence.

Roll Over to an IRA

Lastly, employees can roll over their 401(k)s to an IRA and avoid taxes and penalties. Since an IRA is an eligible retirement account, rollovers from a 401(k) to one are allowed by the IRS.

Distributions from an IRA are still subject to the same rules as those from a 401(k). However, if your goal is to have more control over your investment options, a rollover from a 401(k) to an IRA is void of any taxes and penalties.

The best way to facilitate a rollover from a 401(k) to an IRA is to have your 401(k) plan administrator transfer the funds over. Everything will be handled for you, and your funds will be in your IRA much faster. If your 401(k) administrator sends you a physical check, you’ll have 60 days to deposit into your IRA to avoid taxes and penalties. Most institutions require you to mail the physical check to them, so be sure to obtain tracking information.