Different Ways to Withdraw Funds From Your 401(k)

What Are the Different Ways to Withdraw Funds From My 401(K) Account?

There are a few different ways to withdraw funds from your account, depending on the features offered by your plan. Keep in mind that there are rules for withdrawing retirement funds and potential tax implications to consider.

Hardship Distributions 

Savers may be able to withdraw funds if they can show a substantial financial need. The IRS permits withdrawals for certain scenarios, but generally, this type of withdrawal is meant to cover medical expenses, funeral expenses, and similar emergencies. Unlike a loan, a hardship withdrawal is not required to be paid back.

In-Service Distributions

Simply put, an in-service distribution is a withdrawal that a saver may take from a retirement plan while still employed. You may be allowed to withdraw your contributions from your 401(k) for any reason, often beginning at, but not before, age 59 ½. You may also be able to withdraw your funds that have been rolled in from an outside retirement account before age 59 ½. 

Note: While the IRS permits plans to allow for in-service distributions, 401(k) plans are not required to offer this option. Your 401(k) plan’s Summary Plan Description (SPD), found in the "Plan" tab in your portal's "Documents" section, can provide more information on what types of withdrawals your plan allows. 


Loan Distributions

A 401(k) loan is a way to borrow against your retirement account while agreeing to repay the balance, plus interest, within a specific timeframe. Loans generally have a term of 1-5 years, though your plan may allow for longer-term loans if you use the loan to purchase a principal residence. Your loan must be repaid through payroll deductions or paid off in full through a lump sum payment.

Savers can take out a loan from the vested balance of their plan. According to IRS rules, the maximum loan amount is the lesser of $50,000 or 50% of the saver's vested account balance. There may be restrictions in the plan, such as how many loans a single saver can have outstanding or how many loans a plan can have at any given time across all savers. Learn how to request a loan here

Qualified Birth or Adoption Distributions

Qualified birth or adoption withdrawals from a 401(k) plan are a provision under the SECURE Act, allowing savers to withdraw up to $5,000 per child, without incurring the standard 10% early withdrawal penalty, to cover expenses related to the birth or adoption of a child. These withdrawals must be made within one year of the birth or adoption event. Although the early withdrawal penalty is waived, the withdrawn amount is still subject to regular income taxes. This provision offers financial flexibility for new parents, helping them manage the immediate costs associated with expanding their families while utilizing their retirement savings.

Note: This withdrawal option may not be available for some plans.

Required Minimum Distributions

Required Minimum Distributions are the minimum amount you must withdraw each year from a retirement plan after reaching age 72, or 73 if you reach age 72 after Dec. 31, 2022. However, as is stated on the IRS website, Roth IRAs “do not require withdrawals until after the death of the owner.”

Leaving Your Company 

Vestwell will receive data regarding your employment status. Typically, this information is received on the payroll following the date you leave your company. Your portal will be updated at that time, and you will be given options to either distribute your full account balance or rollover your balance to another retirement account. Click here to learn more about what to do with your funds if you have left your company. 

If you would like further assistance, please contact us at help@vestwell.com.