Withdrawing Funds From Your 401(K) Plan Before You Retire

While taking money out of your 401(k) plan is possible, it can impact your savings progress and long-term retirement goals, so it’s important to carefully weigh the risks, costs and benefits.

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(Image credit: Ameriprise)

Borrowing or withdrawing funds from your 401(k) before you retire is a big decision. After all, you’ve worked hard and saved hard to build up your retirement fund.

Most people have two options:

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Summary of loan allowances
If you have this much vested in your 401(k):Standard rules allow you to borrow up to this much:
$100,000 or more$50,000
$10,000 to $100,00050% of your vested value
$10,000 or less$10,000
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Pros and cons of 401(k) loans
Advantages of a 401(k) loanDisadvantages of a 401(k) loan
Getting a 401(k) loan is generally a quick, easy processMoney removed from your 401(k) will not be able to grow and will not benefit from the effects of compound interest
If you follow the 401(k) loan repayment rules, you won’t be subject to taxes or penalties on the loan amountIf you don’t follow the 401(k) loan repayment rules, you may be subject to taxes and penalties
You don’t need a credit check for a 401(k) loan, and your credit won’t take a hit if you defaultIf you lose (or leave) your job while the loan is outstanding, you typically will have to repay your 401(k) loan within 60 days
Interest paid on the loan is not lost to a lender, because you are the lenderYou must replace the money you borrowed from your 401(k) with post-tax dollars
There are no early repayment penalties if you pay off the loan earlyYou can’t deduct loan interest payments for tax purposes
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Pros and cons of withdrawing money from your 401(k)
You’ll get access to cash quicklyYou’ll be taxed on the amount that you take out
Row 1 - Cell 0 If you’re under 59.5 years of age, you’ll be subject to a 10% 401(k) withdrawal penalty
Row 2 - Cell 0 It may affect your long-term retirement savings goals

Do not use this information as the sole basis for investment decisions; it is not intended as advice designed to meet the particular needs of an individual investor.

Be sure you understand the potential benefits and risks of a 401(k) loan or withdrawal before implementing. As with any decision that has tax implications, you should consult with your tax adviser prior to implementing an IRA rollover.

Ameriprise Financial cannot guarantee future financial results.

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.

© 2023 Ameriprise Financial, Inc. All rights reserved.

This content was provided by Ameriprise. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.

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