How to Borrow From Your 401(k) When You No Longer Work With an Employer

by Linda Ray, studioD

A 401(k) is a retirement vehicle set up through your employer aimed at helping you save for retirement. Many companies match a percentage of the money you invest as a perk or company benefit. You won't be alone if you leave your 401(k) with your employer after you leave a job, according to the Financial Planning Association. About 1/3 of employees leave their accounts in place when they leave a job. There are advantages and disadvantages to leaving it there. However, you cannot borrow from the account when you no longer work for the employer.

Leave your money in the account and find out about the benefits you'll be getting from your new employer. You'll want to be ready to move the entire amount into a new 401(k) so that you can make arrangements for a loan. Ask the benefits officer at your new job if there is a waiting period for loans.

Roll your 401(k) over to your new employer as soon as you are eligible to set up a new 401(k) plan. You then can arrange a loan from your new employer's retirement plan.

Close your account when you leave your job and pay the 10-percent early-withdrawal penalty if you're not yet 55 years old. While it may hurt to take the hit, if you really need the money, it is an option open to you.

Choose another investment vehicle to roll your 401(k) into and keep out the amount of money you need to borrow. You'll only pay a penalty on the amount you do not put into another qualified individual retirement account (IRA) or annuity.

Apply for a hardship distribution if you qualify. You can withdraw the amount of money you invested, although you may not be eligible to receive any earnings that may have accrued on the account. A hardship can include a notice of back taxes owed, extraordinary medical expenses for you or a family member, buying or repairing a house, college tuition or funeral expenses.


  • Expect to pay a 10-percent penalty charge on any outstanding balances you have on a loan you haven't repaid if you lose your job. You have 60 days to repay the loan before being hit with the early-withdrawal penalty. Your job loss can be voluntary or involuntary; it doesn't matter.


  • You will be asked to repay the loan in its entirety if you leave a job with an outstanding loan.

Items you will need

  • New 401(k)
  • Hardship application

About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

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