How to Draw Against a 401(k) Without Penalty

by Cindy Quarters

A 401(k) is a type of savings plan designed to help workers save money for retirement. Money that you place in a 401(k) ideally is left there until you retire, at which time you can begin to receive regular disbursements. Taxes are due when you get money from the account. If you take money prior to retirement, you will be liable not only for the taxes, but also for a 10 percent tax penalty. In some cases you can avoid paying the penalty, if you can meet certain requirements.

1. Remove money from your 401(k) after you are at least 59 ½ years old, even if you are still working. This is the minimum age that you can begin receiving cash disbursements without incurring penalties, though you will still have to pay regular taxes on the funds you get. If you become disabled at any age you can also withdraw the money without penalties.

2. Prove that you qualify for a hardship disbursement under the IRS rules. This means that you need the money to pay for an “immediate and heavy financial need.” This would include money to buy your first home or to pay off large medical bills for you, your spouse or a dependent. You can also get hardship money for tuition expenses, to prevent you from being evicted from your residence and for funeral expenses.

3. Move the money from your 401(k) to another qualified retirement account, such as a Roth Individual Retirement Account (IRA), by rolling the funds over from one account to another. Another type of retirement account may give you more control over how your funds are handled, so a rollover can be a good idea. Be sure to have the 401(k) plan administrator place the funds directly in the new account to avoid any tax withholding. If taxes are withheld, you can get the funds back provided you satisfy the rollover requirements, but you won’t see them until you get your tax refund the following year.

4. Borrow money directly from your 401(k). Your plan may or may not allow this, but if it does you can typically borrow as much as half of the amount you have vested in the plan, up to $50,000. It is important that you be aware you must repay the loan within five years, making regular payments at least once per quarter, or however often your plan specifies. Such a loan is not usually taxable and will not have penalties associated with it. If you leave your company, however, the balance of the loan is likely to become due immediately.


  • Don’t try to put more into your 401(k) than you can afford. This will help to keep you from needing to dip into your retirement funds prematurely.


  • All 401(k) withdrawals – not loans – will incur tax liability, which will cut into the amount that is available for you to use. Consider this before taking any money out of your plan.

Photo Credits

  • Brand X Pictures/Brand X Pictures/Getty Images