The question of whether you can get cash from your 401(k) without leaving your employer is yes, in most cases.
The actual means to do so can vary from plan to plan. In doing so, it is important to note that an employer offering the plan (known as the plan sponsor) can opt-in or out of offering some of these methods.
In most cases, it is written within a plan document as to what types of withdrawals are permitted within the plan.
You have two primary options:
If your plan allows them, you can borrow from your balance in the 401(k) plan. Typically the maximum you can borrow from your account is the lesser of $50,000 or 5% of your balance. You generally have five years to repay the loan. These payments go back into your account along with the interest charged on the loan.
The CARES Act relief package, passed in the wake of the COVID-19 pandemic, increased the maximum amount you can borrow the lesser of $100,000 or 10% of your account balance. Additionally, the act includes more liberal repayment provisions for both these loans as well as for existing plan loans.
Technically speaking, these higher loan limits are supposed to be for those who have been impacted by the pandemic. However, this is done on a self-certification basis. Also note that these increased loan limits must be adopted by your employer.
The main downside of a loan occurs if you either can’t repay the loan or, in some cases, if you leave the employer prior to having paid off the loan.
If you default on the loan this becomes a distribution that is subject to taxes and to a 10% penalty if you are younger than 59 ½.
In some cases, leaving the company with an unpaid loan balance may trigger a distribution, but your plan may have repayment provisions that extend after you leave the company that allow for repayment without triggering taxes or a penalty.
It’s always best to check with your company’s plan administrator so you can fully understand the provisions of the loan.
Many plans offer in-service withdrawals, but the terms and conditions of this option vary widely from plan to plan. This option is offered at the discretion of the employer offering the plan.
There may be restrictions on why and at what age these withdrawals can be taken.
Reasons might include hardship (see the special rules below), or this option may be made available for employees who are over a specified age such as 55 or 59 ½.
While a large percentage of plans offer in-service withdrawals, the rules can be complex as to which portions of your account balance are eligible. For example, this might be limited to employer matching contributions and employer contributions to a profit-sharing account connected to the plan.
Where allowed, in-service withdrawals might be a good option if the investment choices in your company’s plan are sub-par or the plan is a high cost one.
An option, if allowed, might be to roll funds allowed under the in-service withdrawal option to an IRA account where you have a wider range of investment choices.
Many brokerages can help you roll over your 401(k) into an IRA.
If you decide an in-service withdrawal is something you want to explore, be sure to consult with your plan administrator to be sure you understand all of the rules and restrictions involved. You should also consult with your financial advisor or tax professional if you use one.
The CARES Act contains a provision allowing those who are under age 59 ½ to take a distribution from their retirement plan while working, waiving the 10% penalty that would normally be associated with this type of distribution.
The distributions are still subject to income taxes, but these taxes can be spread over a three-year period. You can “re-contribute” some or all of the money taken via this route over a three-year period and avoid some or all of these taxes.
These distributions require that you document that COVID-19 has impacted you or a family member. This means that you or a family member has contracted the virus or that you or a family member has been financially impacted by COVID-19 in ways that might include a job loss or reduced income. For a 401(k) plan, the ability to take these distributions is not automatic, your employer needs to adopt this as a provision of the plan.
The IRS defines a hardship withdrawal as follows,
“A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.”
Your ability to take a hardship withdrawal from your 401(k) is at the discretion of your employer. It may or may not be allowed for plan participants.
If the plan does allow for hardship distributions, the plan must specify the criteria that defines a hardship. This might include medical expenses, the cost of a funeral for a family member or if the funds are needed to prevent eviction from or foreclosure on your residence.
The IRS defines some criteria for a hardship withdrawal. These include:
The IRS considers the following as acceptable reasons for a hardship withdrawal:
Additionally, IRS rules prohibit you from contributing to the plan for a period of at least six months.
There are options to get cash out of your 401(k) plan while still working, but they often involve paying taxes and in some cases a penalty. This can be an expensive source of cash; be sure you look at all of the rules and ramifications before going this route.
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