Can I Cancel My 401(k) and Cash Out While Still Employed?

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Key takeaways

You can access your 401(k) while still employed through loans or hardship withdrawals, but both come with risks.
Early withdrawals may trigger taxes and penalties, reducing your long-term retirement savings.
Before cashing out, consider safer alternatives like personal or home equity loans.

A 401(k) is a great way to invest for retirement. The money can grow unnoticed through pre-tax contributions and employer matches. As the money in your account increases, it can be tempting to dip into it.

Don’t fall into the trap of borrowing from your retirement fund. While it is possible to withdraw funds while employed, most financial advisors strongly recommend against doing so. A healthy 401(k) is essential for a stable retirement. The penalties for early withdrawals almost always exceed the benefits of borrowing.

That said, there are ways to borrow from and even cash out your 401(k) early. Here’s how you can do it and ways to circumvent penalties.

When can you access your 401(k)?
Cashing out your 401(k) while still employed
Tapping into your 401(k) for major expenses
How to take money out of your 401(k) while still working
How long does it take for a 401(k) loan to be approved?
Will my employer know if I take out a 401(k) loan?
What happens to your 401(k) when you quit?
Can I cash out my 401(k) if I get fired?
Alternatives to cashing out
Bottom line

When can you access your 401(k)?

You cannot access your 401(k) without penalties until retirement age 59½, though exceptions exist.

You take early distributions without hefty penalties under these circumstances:

Leave your job after you turn 55 or after 50 for specific federal jobs
Face unexpected financial hardships
Roll the account over to an individual retirement account (IRA)
Become permanently disabled
Are called for active military duties
A divorce ruling mandates splitting a 401(k)
The birth or adoption of a child
You over-contributed to your 401(k)
You are a victim of a disaster for which the IRS granted relief
The money paid an IRS levy
You take out a 401(k) loan

While the IRS will not penalize you for accessing funds, it is still not a good idea. Withdrawing funds prevents the money from working for you and will hurt your retirement savings. Only do so when absolutely necessary.

Once you reach 59½ and retire, you can access funds without a penalty. You will have to pay income tax since you contribute pre-tax dollars to a 401(k). Your tax rate depends on your federal tax bracket at the time of withdrawal.

When you turn 73, you are subject to a minimum distribution requirement. If you don’t take the minimum, the IRS can penalize you by taking 50% of the amount you didn’t withdraw.

You will have to pay fees if you cash out your 401(k) before turning 59½ without qualifying circumstances. The IRS withholds 20% for tax fees and charges a 10% tax penalty on top of regular income tax. For example, if you withdraw $10,000, you’ll only get $7,000 after taxes and penalties.

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Cashing out your 401(k) while still employed

If you’re thinking, “I need my 401(k) money now,” know that you can access it. You won’t be able to cash out and close the account while working at the company, but you can still withdraw funds.

401(k) Loan

You can borrow money from your account without incurring taxes or penalties through a 401(k) loan. Not all plans allow loans, so you’ll need to check with your plan administrator first.

How does a 401(k) loan work? You’re essentially borrowing your own money and repaying yourself. You can borrow up to 50% of your vested account balance, or $50,000, whichever is less. If your account is less than $20,000, you can take out a loan up to $10,000.

You’ll repay the loan, plus interest, through automatic payroll deductions, usually over a five-year term. The interest you pay goes back into your retirement account. Keep in mind, 401(k) loan interest rates are typically 1–2% above the prime rate. Use a 401(k) loan calculator to estimate monthly payments and total interest costs.

Taking a loan from your 401(k) can be a convenient way to get funds, but there are trade-offs. You’ll miss out on potential investment growth. You must pay the remaining balance immediately if you leave your job or if your employer terminates you. If you don’t repay the loan, the IRS may treat the default as an early withdrawal and subject you to taxes and penalties.

Only take out a 401(k) loan as a last resort after exploring other options.

401(k) Hardship withdrawal

If you’re facing serious financial difficulty, a 401(k) hardship withdrawal might be an option. When you withdraw funds for a qualifying hardship, the IRS waives the 10% penalty, and you don’t have to repay the money. You will have to pay income tax.

IRS approved 401(k) hardship withdrawal reasons include:

Medical expenses
Preventing eviction or foreclosure
Tuition payments or other education costs
Funeral expenses
Repairs due to a natural disaster
Down payment for a primary residence

Under 401(k) hardship withdrawal rules, you must prove an “immediate and heavy financial need.” The amount you can withdraw is limited to what’s necessary.

Providers do not have to offer hardship distributions. Consult your HR department and ask about the rules for your plan.

Can I take a hardship withdrawal from my 401(k) if I already have a loan? In many cases, your plan may require you to exhaust loan options first or impose additional restrictions.

Age-based in-service withdrawal

If you’re 59½ or older, your plan may allow age-based in-service withdrawals without the 10% early withdrawal penalty. You can roll over the assets to an IRA, which gives you more control. You’ll still owe income tax, but you’ll have more flexibility than with hardship withdrawals or loans.

Tapping into your 401(k) for major expenses

Accessing your 401(k) funds is tempting to cover major expenses you can’t afford otherwise. Two of the most frequent uses are paying off high-interest debt and buying a home.

401(k) Loan to pay off credit card debt

If you’re wondering how to pay off $20,000 in credit card debt, one option might be a 401(k) loan for debt consolidation. You borrow money from your 401(k) to pay off creditors, leaving you with one monthly bill.

Using a 401(k) loan to pay off credit card debt is tempting. The interest rate is low, and everything returns to your retirement account. Plus, taking a loan from your 401(k) doesn’t affect your credit – no credit check or reporting is involved.

The catch with taking out a 401(k) loan to pay off debt is that you risk falling behind on retirement savings. If you lose your job, you must repay the money immediately.

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401(k) Loan for home purchase

Can I use my 401(k) to buy a house? First-time homebuyers can use a 401(k) loan to help with down payments or closing costs. Some plans may also allow a hardship withdrawal for a primary residence but not for mortgage payments. The repayment terms may be extended up to 15 years for home purchases, offering more flexibility.

How to take money out of your 401(k) while still working

Your HR department or benefits portal will have clear instructions on how to take a loan from 401k, hardship withdrawal, or in-service withdrawal.

Review your plan’s distribution options

Not all employers offer every type of distribution. Speak with your plan administrator to learn what your plan allows.

Decide which type of withdrawal fits your needs

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To take out a 401(k) withdrawal, you must have a qualifying hardship to avoid early withdrawal penalties. Otherwise, a loan may work better to avoid taxes and penalties.

Gather required documentation

You must provide documentation and explain why you need the money. Your plan administrator will provide guidance on what you need to do.

If you’re making a hardship withdrawal, you must submit proof of financial hardship. Proof could be medical bills, eviction notices, or college invoices.

Submit your request

Submit your request through your plan administrator or online portal. Processing times vary from a few days to two weeks.

Get the funds and check the amount

Once your request is approved, the plan sponsor will deposit the money into your bank account or mail you a check. Be sure to review the amount. Some plans withhold taxes automatically for hardship withdrawals.

Manage repayments and taxes

If you took a loan, ensure you’re set up for payroll deductions and understand the full repayment schedule. Consider setting aside some funds for tax season if you received a hardship or in-service withdrawal.

Consult a professional

Before taking money from your retirement account, talk to a financial advisor. They can help you understand the long-term implications and whether other options make more sense for your situation.

Pros and cons of a 401(k) loan

Pros:

No credit check
Low interest rate
Interest is paid to your account
Quick access to funds
Doesn’t affect your credit score
Can be used for major expenses
Tax-free

Cons:

Pay immediately if you lose your job
Defaults are treated as taxable withdrawals
Not all employers offer 401(k) loans
May derail your retirement savings progress
Lose out on long-term compounding interest

How long does it take for a 401(k) loan to be approved?

The approval time depends on your plan provider, whether you meet the basic criteria, and how you applied for the loan.

Some providers will approve and process the loan in two to three business days. Others need up to two weeks. The timeline will be faster if you request the loan online and your employer’s plan supports self-service processing.

Will my employer know if I take out a 401(k) loan?

Your employer will know if you borrow against your 401(k) since they administer the plan. The HR department will manage the loan request and set up repayment.

Your immediate supervisor may not know that you withdrew money. The HR, finance personnel, and upper management will be aware.

What happens to your 401(k) when you quit?

Your 401(k) stays open unless you roll it into an IRA, transfer it to a new employer’s 401(k), or withdraw the funds.

You can cash out your 401(k) if you quit your job. If you are under 55, you will be subject to a 10% early withdrawal penalty.

Financial experts do not recommend withdrawing your 401(k) after leaving your job. The smartest move is often to roll it into a new retirement plan. Rolling your old 401(k) lets you avoid taxes and grow your retirement savings.

How long can a company hold your 401(k) after you leave?

The timeline for how long your former employer will keep your 401(k) open depends on your balance. You can leave the account indefinitely if your balance is over $7,000, but you cannot contribute.

If your balance is under $7,000, the company may force you out of the plan. They will distribute the funds, roll them into an IRA, or transfer them to your new employer’s plan. Some companies have adopted auto-portability, automatically transferring small balances to your new employer’s 401(k).

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Can I cash out my 401(k) if I get fired?

You can cash out if you lose your job but consider the consequences. You must pay income tax and penalties if you’re under retirement age. You can withdraw money penalty-free if you’re over 55 or over 50 for certain federal employees.

A better choice is to roll the funds into an IRA or your new employer’s plan. You’ll avoid penalties and taxes, and your savings will continue to grow.

Alternatives to cashing out

There are better ways to consolidate debt than cashing out your 401(k).

Home equity loan

A home equity loan for debt consolidation or home improvements provides a lump sum at a fixed interest rate. You use the equity you’ve built in your property as collateral. Your home secures the loan, so your interest rate is low, but you risk losing your property.

Personal loan

Another common option is a personal loan to pay off credit card debt. These loans are unsecured – no collateral required – making them low-risk. They tend to have lower interest rates than credit cards, so you should save money. If you have bad credit, look for second chance loans, though the interest rates may be higher.

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A balance transfer credit card can be the solution for those with good to excellent credit. Balance transfers often come with a 12 to 21-month interest-free period. Pay off your balance during this time, and you’ll save money on interest.

Debt relief

The best debt relief option isn’t one-size-fits-all. It depends on your debt type, total amount, and willingness to commit to a plan.

Consider settlement, debt management plans, or even bankruptcy if consolidation doesn’t appeal to you. Always do your research to understand the fees and consequences. Reading a National Debt Relief review can help you make an informed decision.

Frequently asked questions

1. Can I cash out my 401(k) if I quit my job?

Cashing out your 401(k) after leaving a job is possible, but you’ll pay a 10% early withdrawal penalty. Consider rolling it into an IRA or your new employer’s plan to avoid penalties.

2. Can you withdraw from 401(k) at 59½ while still working?

At 59½, you can withdraw funds without penalty if your employer offers in-service withdrawals.

3. Can I use my 401(k) as collateral for a loan?

No, the IRS prohibits using a 401(k) as collateral for a loan.

4. How can I repay my 401(k) loan after leaving my job?

You will have a short window, often 60 to 90 days, to repay in full. The unpaid balance is seen as a distribution if you don’t pay. This will trigger income tax and may lead to a 10% early withdrawal penalty if you are under 59½.

5. How soon can I take out a 401(k) loan after paying one off?

The timing for taking another 401(k) loan depends on your plan’s rules. Some plans allow back-to-back loans, while others impose waiting periods. You must still meet the IRS limit: no more than 50% of your vested balance, up to $50,000, including outstanding loans.

6. Can I withdraw from my 401(k) if I have an outstanding loan?

You can still withdraw from your 401(k) when you have an outstanding loan if you qualify for a hardship withdrawal. Your plan may require you to exhaust loan options first or restrict additional borrowing.

7. How can I pay off a 401(k) loan early?

To pay off a 401(k) loan early, contact your plan administrator to confirm the payoff amount and process. You can typically make a lump-sum payment without penalties. Early repayment helps minimize interest and restore your retirement balance sooner, improving your long-term savings growth.

Bottom line

Canceling and cashing out your 401(k) plan is not a good idea. Any time you take money from your nest egg, you jeopardize your retirement.

Before dipping into retirement funds, consider all other options. Look into nonprofit credit counseling. Counselors can provide guidance and support on personal finances. Whatever you do, avoid taking retirement distributions early whenever possible.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor's credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor's degree in journalism and an MBA.

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