The Pros and Cons of Tapping into Your 401(k) in Times of Need

Pros and Cons of Prematurely Withdrawing Funds from Your 401(k) Account

These are uncertain times, at best. And for those of you diligent enough to save for your retirement, the volatile stock market has become particularly unsettling. History has shown the best course of action may be to take no action at all, so if that’s a viable option, you may want to forget your password for a few months, focus on staying healthy, and revisit your retirement plan assets at a less humbling time. However, we recognize that it isn’t a realistic option for everyone. Should you find yourself in a more dire situation, here are the choices as they pertain to your 401(k) and the various points to consider before making any short-term decisions.

Temporarily Discontinue or Reduce Deferrals

If immediate cash flow is more important to you than long-term savings, you should have an easy way to change the amount you contribute each pay period to your retirement plan.


If your plan allows it, you may borrow from your account balance and pay yourself back through loan repayments via a payroll deduction. If your employment terminates, most programs permit loans to be taken soon after employment separation.


  • Funds can become available in as little as seven business days.

  • Loan amounts are not subject to taxation, and interest rates are likely lower than those of credit cards.


  • While the loan amount isn’t taxed, loan repayments are made on an after-tax basis; therefore, you are paying taxes on this money before you can pay it down. Additionally, if you’re using a traditional 401(k) plan, you will be taxed on this money again when you take your distribution from the program.

  • If you take out a loan while you’re still employed and then terminate employment, your plan may require you to pay back the loan quickly, which may cause financial hardship.


If you find yourself in a time of financial hardship (defined as an immediate and heavy financial

need such as to pay for things like medical expenses, burial expenses, or to avoid foreclosure on the primary residence), you may be able to withdraw funds from your plan without facing tax penalties. We are closely watching whether the government will make hardship withdrawals easier in today’s unique environment. In the meantime, hardships are only available if the plan allows it - or your employer amends the plan to enable them - and the plan administrator must approve an application with proof of hardship.


  • Funds can be available to the participant within ten business days once your provider receives all supporting documentation in good order.


  • Once the hardship is taken, there is no option to contribute it back into the plan; therefore, any losses are locked in.

  • You may be required to take a loan before receiving a hardship distribution.

  • Taking any money out will reduce the amount you will have at retirement, not to mention that you lose any interest and dividends you earned on the amount withdrawn.

In-Service Distributions

Some plans offer an opportunity for participants to withdraw from their retirement plan even if they cannot satisfy the hardship standard and are still employed by the plan sponsor. There may be an age requirement to access funds from a safe harbor plan, so be sure to check your plan to confirm whether you qualify for this type of withdrawal.


  • Participants can generally receive funds from their account within ten days of the provider receiving the request.


  • As with a hardship distribution, there is no option to contribute this withdrawal back to your plan, so you are locking in market losses.

  • Withdrawals reduce the amount you will have at retirement, not to mention that you lose any interest and dividends earned on the amount withdrawn.

  • Some in-service withdrawals may be taxed, especially for participants younger than 59 ½.

In the meantime, to find out whether your plan offers any or all of these options, you can visit the Summary Plan Description (SPD) on your portal. All loans and distribution forms are also available by logging in. If you need help logging in, you can also contact your HR team for further guidance. As always, we’re here for you at to answer any questions about your plan.

Please also note that Vestwell is not a law firm or tax advisor. Consider consulting your financial professional before taking any action concerning your retirement plan.