How to cash out your 401k without quitting your job

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Saving — and generating — capital for retirement in the USA is mainly done through a 401(k) plan. They were initiated in 1978 and have since been an indispensable facet of saving for the future and posterity for many Americans.

The 401(k) plan is essentially a tax-deferred retirement account, meaning that the assets you put in it won’t get taxed until you cash them out.

More than 62 million US workers are covered by these plans, and they accumulatively hold over $2.8 trillion in assets.

Having a 401(k) plan is a fundamental part of accumulating capital for your retirement plan. And that is why there are plenty of requirements set by the IRS to try to hinder you from cashing out the finances from the account, but there are still various ways to access it.

Most plan participants start their 401(k) plans with the concept of not tapping into the funds until they’re aged enough for retirement, but frequently things can happen that could make you question whether you should cash out the funds from your 401(k) now. But should you do it?

We’re going to support you in learning more about cashing out your 401(k) and help you understand the advantages and disadvantages of doing it. You’ll learn:

  • What are the opportunities of withdrawing the money from your 401(k)?
  • Can you cash out your 401(k) without terminating your employment?
  • What are 401(k) loans?
  • What are 401(k) in-service withdrawals?
  • What does rolling over a 401(k) mean?
  • What are the tax implications on cashing out your 401(k)?
  • What are the disadvantages of cashing out your 401(k)?
  • What are the alternatives to cashing out your 401(k)?

Hopefully, this article will help you gain more knowledge about 401(k) plans, saving money for retirement, starting imperative financial discourse, and making the most satisfactory imaginable resolution for you and your loved ones.

What are the options of withdrawing the money?

There are plenty of different options for withdrawing the money from your 401(k) plan. Most of them depend on the kind of plan you have and whether it allows for these kinds of withdrawals, but there are some rules according to the law that you have to follow if you want to cash out your 401(k).


To qualify for a regular withdrawal of money from your 401(k) without any penalties involved, you have to be at least 59 ½ years old. In this case you won’t have to leave your job to access the money, meaning that you don’t necessarily have to be retired to take advantage of your retirement funds.

You can either chose to take a lump sum or have annual or monthly payments of your funds. All the funds in your 401(k) are tax-deferred, so you’re going to have tax consequences either way, which we will teach you more about later.

Age 55 Exception

If your 401(k) plan allows it, you could withdraw money from your account at the age of 55 or during the calendar year when you turn 55, but only if you stopped working fr your current employer.

In this case, you won’t have any early withdrawal penalties to pay for, but you’ll still have taxes.

Age 50 Exception

There’s also an age 50 exception to the age-limit rule, but only for people who worked in public safety. So if you worked for the police, firefighters, emergency medical services or a governmental unit, you are qualified to cash out money from your 401(k) without paying for penalties.

Required Minimum Distributions

Just because you can freely access your 401(k) if you’re older than 59 ½ doesn’t mean that you have to do it. However, according to law, when you turn 72 years old, you must make the required minimum distributions from your 401(k) or face penalties.

Also, if you inherited the account, you’ll usually have to make required minimum distributions regardless of your age.


In case of your death or the death of the 401(k) plan holder, the IRS allows the listed beneficiaries to withdraw the money from the account without paying for any penalties. Just make sure that your list of beneficiaries is up to date.


Considering that the IRS doesn’t strictly regulate the 401(k) plans as the usual pension funds, the rules that apply from plan to plan can differ, especially in the case of disability.

However, most plans follow the same rules as an IRA, meaning that only totally and permanently disabled people who are stopped from doing their job can apply to withdraw money from their 401(k) as disabled people.

In this case you will have to provide a disability letter for your 401(k) custodian so that they can verify your status and you can withdraw the money while avoiding the penalty.

Series of Substantially Equal Periodic Payments

This is another case where you can withdraw your 401(k) money without penalties even before turning 59 ½. Another name for this is 72(t).

If your plan allows it, you can agree to get the same monthly payment from your plan for the next five years or until you reach the age of 59 ½, whichever period is longer.

There are three methods to this:

  • Required Minimum Distribution Method: this method uses the IRS RMD table to determine your Equal Payments based on your yearly account balance and your life expectancy factor.
  • Fixed Amortization Method: your Equal Payment is calculated based on one of three life expectancy tables made by the IRS.
  • Fixed Annutization Method: your Equal Payments are determined using the annuitization factor made by the IRS.

High Unreimbursed Medical Expenses

In case of medical expenses that are higher than 7.5% of your AGI (Adjusted Gross Income), you are allowed to cash out enough funds from your 401(k) plan to cover them.

You can use this for medical bills for yourself, your spouse, or any of your qualified dependents. To avoid penalty, you’ll have to withdraw the money the same year when the medical bills are incurred.

Disaster relief

If you live in an area of the USA where natural disasters like floods or storms are often, your location is probably deemed for disaster relief. This is another situation where you can access your 401(k) funds without penalties.

Corrective Distributions of Excess Contributions

If excess contributions are made to your retirement account, you could return these without penalties under certain conditions and if your 401(k) plan allows it.

IRS Levy

If the IRS levies your account because of unpaid taxes or penalties, this distribution is generally not subject to penalties.


If you automatically get enrolled into a 401(k) plan that you didn’t want, you might be allowed to make withdrawals to switch to a different plan without having to pay for any penalties. According to your 401(k) plan, if this is possible, there is generally a time limit within which you can do this after the auto-enrollment, so you should check this with your plan provider.

Qualified Reservist

If you were called on duty after September 11, 2001, and you actively served for a minimum of 6 months, you may be allowed to withdraw money from your 401(k) during active duty without paying for any penalties.


If the court orders you to give your 401(k) funds to your former spouse or a dependent in case of divorce, you’ll be able to withdraw the money from the account penalty-free.

Roth IRA or Roth 401(k) Conversion

You can roll over your funds from the 401(k) account and convert them for Roth IRA or Roth 401(k), and in this case you won’t need to pay for penalties for early withdrawal. However, for converting to Roth IRA you are usually required to leave the job, while that’s not the case for Roth 401(k).

Birth or Adoption

This is the new penalty exception for withdrawing funds from your 401(k) plan.

After the child is born or the adoption process is finalized, you can withdraw up to $5,000 from your account within one year of the birth or adoption. You also have the option of paying this back.

CARES Act Withdrawal

The CARES Act withdrawal, which we’ll teach you more about later, was a special new addition that started in 2020 due to the growing financial crisis that began with the COVID-19 pandemic.

This addition to 401(k) plans ended on December 31st, 2020. It allowed plan participants affected by the pandemic in some ways to withdraw up to $100,000 from 401(k) accounts without penalties.

Can I cash out my 401(k) without quitting my job?

The short answer is — yes. It’s entirely conceivable to withdraw finances from your retirement account without relinquishing your employment. There are a couple of approaches to this problem, which we will explain to you now.

Making an early withdrawal

As pointed out previously, under commonplace circumstances, the regulation requires you to be at least 59 ½ years old to withdraw funds from your plan without any penalties and without having to terminate your employment.

If you want to make an early withdrawal of your assets, you’ll most likely have to make reimbursements for both taxes and tax penalties, depending on the circumstances. Distinctive situations are specified at the beginning of this article.

Making a hardship withdrawal

If you are in an immediate and substantial financial need, the IRS allows you to make early withdrawals if you declare hardship and if your case fits one of the situations which are determined by the law.

In case of hardship, you may be able to access some or all of your funds depending on the situation and your plan provider. You usually won’t need to pay any penalties. We will go into more detail about hardship withdrawals later in this article.

Taking out a 401(k) loan

If you need to access the assets from your plan but aren’t entitled to any other variety of withdrawals, you could take out a loan against your 401(k) plan if your plan provider authorizes this. Make sure to check this information with your plan administrator.

This is essentially borrowing the assets from your future self and you will have to pay it back to the same account with interest. You can take out up to 50% of the funds from your account or up to $50,000. The time limit for paying off this loan is usually up to five years.

Even though it can be tempting, there are many disadvantages to taking out a loan against your 401(k) and we will delve into all of them later.

Taking a corona virus-related withdrawal

Taking a withdrawal related to the pandemic could be done through the CARES Act in 2020, but it isn’t available anymore.

This allowed users to withdraw up to $100,000 without having to pay for penalties in case someone in their family got COVID-19 or suffered a job loss and lower income as a result of the pandemic. This amount had to be paid back, which means that this worked similarly to the regular 401(k) loan.

401(k) loans

Here we’re going to help you understand the mechanism, advantages, disadvantages and the process of reimbursing the 401k loan.

First of all, you have to be currently employed to take out a loan and to even petition for the loan you have to have a 401k plan that permits you to take out a loan, so if you aren’t assured, inquire about this with your plan provider.

In 2018, 78% of 401(k) plans permitted plan participants to take out a loan against their plan.

Next, you should solely take out a loan against your 401(k) if you aren’t entitled to any other variety of early withdrawals and you legitimately require the funds, but even then it’s not the most outstanding opportunity. You could select this loan if you have a short-term disability but still aim to return to your place of employment after you recover.

The excellent news is that you can also use the funds for anything you require and the paying back is customarily done automatically through your monthly check.

The restriction to the amount of funds that you can loan from your plan is up to 50% of your vested funds in the account or up to $50,000, whichever one is the lower amount. Because this is a loan, you’ll have to reimburse it with interest.

The interest hinges on the plan that you possess. The good news is that all the funds that you borrowed you reimburse to yourself, so conclusively, you’ll have more assets than what your foundation was built upon. The prevailing deadline for refunding your account statement is up to 5 years, which isn’t a lot of time at all.

You won’t need to pay penalties or taxes for these funds because it’s considered a loan, but if you don’t reimburse it in time you’ll have to handle tax statements.

Another disadvantage of 401(k) loans is that you will ordinarily be obligated to compensate for the loan instantly if you get terminated from your place of employment. If you can’t do this, those funds will be treated like income which you’ll have to get taxed for, and you’ll receive an additional 10% tax penalty for early withdrawal. This will likewise happen if you don’t pay back the loan within the declared time frame.

Your plan might have repayment provisions that extend even after you leave the company, so you won’t have to deal with taxes or a penalty, but this is another element that you need to inquire about with your plan provider.

There are more disadvantages to taking out a loan against your 401(k) than there are advantages, so in case you have to do it and you have no other alternative, make sure to be ready and to work on having emergency funds in case you have to reimburse the loan immediately. Also, it might be best to consult your financial advisor before choosing to take out this loan.

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In-service 401(k) withdrawals

Most 401(k) plans offer in-service withdrawals, but there may be some discrepancies as to why and at what age a plan participant can make these withdrawals.

Ordinarily, users eligible for in-service withdrawals without penalties are employed people older than 59 ½ and those entitled to a hardship withdrawal.

Depending on the kind of plan you have, requirements can be intricate regarding which segments of your funds you can access.

Some employers will let you require in-service withdrawals if you want to roll over your funds to a separate account or a similar plan. People older than 59 ½ can roll over all of their vested assets, but younger plan participants can only roll over their own contributions and earnings.

Rolling over funds from a different retirement account is also viable as an in-service withdrawal.

In-service withdrawals can be a valuable opportunity if the investment varieties in the corporation you work for are not that tremendous or if the plan’s cost is too high.

On the other side, if you want to make an early withdrawal from your funds instead of a loan, this amount will be taxed as ordinary income and if you’re under the age of 59 ½ you’ll have to pay the 10 % penalty for early withdrawals in most cases.

The helpful news is that in the case of in-service withdrawals, you don’t have to reimburse the funds like you do when you take out a loan against your 401(k).

CARES Act 401(k) early withdrawals

The CARES Act relief package was active during 2020 to help those affected by the COVID-19 pandemic.

Essentially, this worked like a regular 401(k) loan, but it was more liberal with both the sum that can be borrowed and the repayment provisions. Although, not all plan providers had this option available.

Qualifying for CARES Act withdrawal could only be done if your situation is one form the comprehensive list made by the IRS. Some of these situations include if you, your spouse, or your dependents, got sick with the COVID-19 virus and you needed the money for the medical bills. Or if you or someone from your home suffered a job loss and thus lower income for your household.

The loan limit first has to be adopted by the employer. Taking out a CARES Act withdrawal is limited to up to 100% of your vested 401(k) plan account balance, or up to $100,000, whichever sum is lower. In this case, just like with the regular 401(k) loan, you won’t need to pay the usual 10% penalty for early withdrawal.

There are still income taxes in this case, but they can be spread over three years. If you can reimburse some of the money taken as a part of this loan you can avoid some of these taxes.

Hardship withdrawals

Hardship withdrawals, as mentioned before, are a type of early withdrawals made because of immediate and heavy financial need.

As always, the exact rules depend on your plan provider, but they generally follow similar rules in case of financial hardship.

Before you make a hardship withdrawal, you have to check out any requirements that you need to follow or if the provision for hardship distributions is a part of the plan you’re using.

If your plan permits it, you can get access to some or all of your money in the 401(k) account when you declare a hardship. Most plans don’t include employer matching funds and earnings in the amount that you can withdraw.

The IRS defines the criteria for hardship withdrawal as these:

  • You require immediate and heavy financial help.
  • This withdrawal is necessary because you don’t have any other source of available funds that will help you meet your needs.
  • The amount of money that you take can’t exceed the amount of money that you need for an emergency.

Some of the situations in which you can declare a hardship and request a withdrawal are:

  • High medical bills for you, your spouse, or your dependent that need to be paid immediately;
  • In case you need to keep your home from foreclosure or eviction.
  • To pay for burial and funeral expenses;
  • To pay for college tuition or post-secondary education expenses for the next 12 months;
  • You need a down payment for buying your primary residence (up to $10,000);
  • You need money for immediate repairs on your primary home.

The money taken as a hardship withdrawal is taxed as regular income, and you may even have to pay the 10% penalty fee for early withdrawal. However, you’re allowed to take out enough money to cover the taxes in this case, and it doesn’t need to be paid back to the borrower’s account.

Additionally, according to the IRS, you are prohibited from contributing assets to your 401(k) plan for six months after taking out a hardship withdrawal.

What does rolling over a 401(k) mean?

Rolling over your 401(k) fundamentally means moving the funds from one place to another, and it customarily happens between different places of employment.

When you leave a job for any reason, you generally have three opportunities. You can either leave your 401(k) with your current employer, roll over the funds to an IRA, or roll over the funds to a new employer’s 401(k) plan.

In any case, you should either be able to execute a direct or an indirect rollover. A direct rollover implies that the assets move directly from your previous 401(k) plan to the one at your new job. The indirect rollover transpires when you receive the funds as a distribution from your previous employer, but you have to put it into the new account within 60 days or face taxes and penalties.

Leaving your 401(k) with an old employer is very uncommon and has many drawbacks. If you possess less than $5,000 in savings they could force you out by presenting you a check, in which case you will have to do an indirect rollover to your next employer’s plan.

You also won’t be able to generate contributions and take out loans, and your former employer may even add administration fees. Because of this most plan participants roll over their 401(k) to their new employer.

Rolling over into an IRA is another option, frequently done by plan participants leaving the workforce or who have a new employer that doesn’t have 401(k) plans. There are both advantages and disadvantages to rolling over your funds to an IRA. You can take out assets when you’re younger than 59 ½, but you lose the options like hardship withdrawals and have less protection of your assets.

Rolling over to a different 401(k) plan can be done directly or indirectly and is usually the best choice.

Tax implications of cashing out 401(k)

The assets that you put in your 401(k) are tax-deferred, which means that you’re not paying those taxes now, but you will settle them when you take out the funds, except for in some cases. Here’s some advice that we can share with you.

Leave the money alone

This money will only get taxed when you take it out of the account or make distributions.

We discussed 401(k) and how the phenomenon is that you never know what taxes will be like in the future and whether it’s best to cash out your 401(k) now or later.

However, compound interest only works if you leave the funds alone. Taking a few hundred dollars from your plan now could cost you thousands in the future. So it’s best not to take your money out and let it increase without interruptions.

Every time you make a withdrawal, you squander some part of your funds to taxes because it’s considered your income and just gets added to your tax bracket at the end of the year. Also, every time you make an early withdrawal you will most likely have to pay the 10% penalty fee.

Move the money to a new 401(k) plan

As explained as a part of rollovers, moving the funds to a new 401(k) when you have a new employer isn’t taxed and there aren’t any penalties except in one case.

If you don’t opt for a direct rollover and choose an indirect one instead, you have to get your assets to a new plan in 60 days, or you’ll have to compensate for taxes and the 10% penalty.

Establish a rollover IRA

If you’re changing places of employment and you have more than $5,000 in your account, your plan sponsor will ordinarily distribute those funds to you but keep 20% of it for penalties if you’re under the age of 59 ½.

You can roll over your funds into an IRA account if you want to sidestep this penalty, but you have to do it within 60 days. You can also put your assets into a traditional IRA to avoid current taxes.

Cash out and take a distribution

If you’re older than 59 ½ and you decide to withdraw funds from your account, you won’t have to pay any penalties. However, the funds that you removed will be taxed as your income.

Early distributions are always penalized. If you’re under the age of 59 ½ and you want to make a withdrawal, you’ll be taxed with a 10% excise tax on the amount you withdrew. The exemptions for this penalty are in case of disability, medical bills that excess 7.5% of your gross income, or if you retire after the age of 55.

In addition to that, if you cash out your 401(k) before turning 59 ½, your employer has to withhold 20% of your assets for taxes besides the 10% penalty fee.

All distributions are taken at regular income tax rates for your tax bracket because your taxes got deferred when you put your assets into a 401(k). Any withdrawal is considered taxable income.

Considering that loans don’t have a tax impact, if you take a loan you’re fine as long as you reimburse it on time or whenever you need to. If you don’t, you will get taxed at regular income rates and you will have to pay the 10% penalty fee.

We didn’t take any relevant state income tax into account, but you should also always keep that in mind.

Should you cash out your 401(k)?

The short response is — no.

Cashing out your 401(k) is something that you shouldn’t execute if you can help it, as it’s frequently a substandard financial resolution in the long run.

When you take out an early withdrawal, you have to compensate for the penalty fee on top of regular income tax and state tax. This means that you lose a lot of funds every time you seize assets from your account.

The average 401(k) plan account balance for consistent plan participants increased at a compound annual average growth rate of 13.9% from 2010 to 2018, rising from $63,756 to $180,251.

When you leave your funds alone you can let them increase over decades because of interests, but every time you cash out your 401(k), you waste funds in the future, no matter how minuscule the amount seems.

Retirement savings need to be taken very vigorously and you shouldn’t plunder your future self.

The positive fact about keeping funds in your 401(k) is that its safety is legally guaranteed even if you file for bankruptcy and creditors can’t get to it.

Of course, in some cases this will be your last resort, but in any other circumstance, do your best to circumvent it.

Alternatives to cashing out 401k

Cashing out your 401(k) is generally a bad idea. But don’t worry! We have an alternative for you.

We’re going to introduce you to the concept of infinite banking.

Owning a whole life insurance policy is the first step in implementing infinite banking that could help you secure retirement income and bring you additional benefits. Here are the most important things you should know about Whole Life Insurance and Infinite Banking.

The concept of infinite banking is about strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system. In other words, Infinite Banking is essentially being your own banker.

One of the many benefits of a whole life insurance policy is that policyholders can borrow money using their policy’s cash value. Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.

The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.

Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.

Infinite Banking involves:

  1. Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company.
  2. Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
  3. Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.

The way infinite banking works allows you to mimic the way a bank operates and borrows money.

Instead of borrowing from a bank, you borrow from yourself while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.

Whether it be for your child’s education, a downpayment on the house, or medical expenses, borrowing for yourself and being your own bank allows you the financial freedom and control of your money.

Entering the Banking Business gives you much better control over your finances and helps you build wealth using the life insurance policy.

How to build wealth with compound interest

First, we need to explain what compound interest is. With compound interest, unlike simple interest, you invest your money, earn money, and then invest that new money you made along with the sum you started out with, and that adds up year after year. Especially with considerable sums in your 401(k).

This is called compounding. Wealth is something that you create and compounding is a great way to do so. You can make money from both guaranteed and non-guaranteed investments while using compound interest. You can even take care of your retirement money this way.

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Every year you can invest your money to make more money next year and save up for your future. These are the secrets of building wealth with compound interest. There are a lot of investment options out there that you can take and compound interest is closely related to retirement topics.

For example, if you invest $1,000 now in a guaranteed investment, years down the line your annual compound could go up to a couple of thousand dollars.

Before you start, you need to have a good foundation. Getting rid of consumer debt is your first step. If you don’t pay off your credit card balance, you will be charged interest on your entire owning balance, including the interest added to your account the previous month. This will just make your credit card debt bigger.

After all, avoiding debt is one of the habits of millionaires.

Every time you invest with compound interest, you’re taking another step towards a brighter and wealthier future.

Final thoughts

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We hope that we helped you understand your 401(k) plan better and that you realized that there are more brilliant alternatives than cashing it out. Also, we hope that finding out about Whole Life Insurance and Infinite Banking made you interested in these options.

If you want to learn more about Whole Life Insurance and improve your personal finances, you can sign up for our premium membership! We are looking forward to seeing you at the Wealth Nation community!