How to close your 401k while still employed

Table of Contents Show

Reasons you may want to roll over now
Reasons you may want to wait to roll over your 401(k)
Most people have two options:
A 401(k) loan
Common 401(k) loan questions
Withdrawals from a 401(k)
401(k) loan or withdrawal - is it a good idea for me?
Can I roll my 401k out while still employed?
How do I cash out my 401k?
Can I close my 401k before retirement?

Key Points

Most people roll over 401(k) savings into an IRA when they change jobs or retire. But, the majority of 401(k) plans allow employees to roll over funds while they are still working.
A 401(k) rollover into an IRA may offer the opportunity for more control, more diversified investments and flexible beneficiary options.
This strategy may not work well for everyone. Work with your advisor to weigh the costs and benefits.

Most people only think about rolling over their 401(k) savings into an IRA when they change jobs. For many people, that is an ideal time to shift funds because they can consolidate several retirement accounts from previous employers in one place and take advantage of more investment options. Though there could be reasons not to do so as well.

When leaving an employer, there are typically four 401(k) options:

Leave the money in your former employer's plan, if permitted
Roll over the assets to the new employer's plan if one exists and rollovers are permitted
Roll over to an IRA
Cash out the account value

But, leaving an employer isn't the only time you can move your 401(k) savings. Sometimes it makes sense to roll over your 401(k) assets while you continue to work and make further contributions to your company plan. These rollovers may help you more effectively manage your retirement savings and diversify your investments. It is important to really weigh the pros and cons when considering this. But first, do some checking to see if you're eligible. Not every 401(k) plan allows you to roll over your 401(k) while you are still working.

Reasons you may want to roll over now

Diversification. Investment options in your 401(k) can be limited and are selected by the plan sponsor. Rolling your funds over into an IRA can often broaden your choice of investments. More choices can mean more diversification in your retirement portfolio and the opportunity to invest in a wider range of asset classes including individual stocks and bonds, managed accounts, REITs and annuities.
Beneficiary flexibility. With some IRAs, you may be able to name multiple and contingent beneficiaries or name a trust as the beneficiary. Other IRAs may allow you to impose restrictions on beneficiaries. These options aren't usually available with 401(k)s. But, keep in mind, not all IRA custodians have the same rules about beneficiaries so be sure to check carefully.
Ownership control. You are the owner and have access rights with an IRA. The assets in your IRA are also not subject to blackout periods. With a 401(k) plan, the qualified plan trustee owns the assets and assets may be subject to blackout periods in which account access is limited.
Distribution options. If your IRA is set up as a Roth IRA, there is not a set age when the owner is required to take minimum distributions. With 401(k) plans and traditional IRAs, the owner will have to take required minimum distributions by April 1 of the year after they turn age 72.

Reasons you may want to wait to roll over your 401(k)

Temporary ban on contributions. Some plan sponsors impose a temporary ban on further 401(k) contributions for employees who withdraw funds before leaving the company. You'll want to determine if the gap in contributions will significantly impact your retirement savings.
Early retirement. Most 401(k)s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
Increased fees. IRA investors may pay more fees than they would in employer-sponsored plans. One reason: The range of more sophisticated investment options you may choose can be more expensive than 401(k) investments. Your advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
Can take loans out. Your 401(k) may permit you to take out a loan from the account, but this is typically only for active employees. And you may have to pay in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs.

Next steps

Your advisor can help you determine if an early 401(k) rollover fits in with your retirement savings plan. They can also help determine what investments are best for you if you do decide to roll over your funds.

Borrowing or withdrawing money 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. 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.

Most people have two options:

A 401(k) loan
A withdrawal

Whether you’re considering a loan or a withdrawal, a financial advisor can help you make an informed decision that considers the long-term impacts on your financial goals and retirement.

Here are some common questions and concerns about borrowing or withdrawing money from your 401(k) before retirement.

A 401(k) loan

A 401(k) loan allows you to borrow against your own 401(k) retirement account, or essentially borrow money from yourself. While you’ll pay interest similar to a more traditional loan, the interest payments go back into your account so you’ll be paying interest to yourself.

People borrow from their 401(k) for a variety of reasons, such as funding the purchase of a house or paying for a dependent’s college tuition. While there are some plans that only allow participants to take a loan for certain approved reasons, in most cases, you won’t need to declare why you are borrowing from your 401(k).

Common 401(k) loan questions

Can I borrow against my 401(k)?
Check with your plan administrator to find out if 401(k) loans are allowed under your employer’s plan rules. Keep in mind that even though you’re borrowing your own retirement money, there are certain rules you must follow to avoid penalties and taxes.

How much can I borrow against my 401(k)?
You can borrow up to 50% of the vested value of your account, up to a maximum of $50,000 for individuals with $100,000 or more vested. If your account balance is less than $10,000, you will only be allowed to borrow up to $10,000.

How often can I borrow from my 401(k)?
Most employer 401(k) plans will only allow one loan at a time, and you must repay that loan before you can take out another one. Even if your 401(k) plan does allow multiple loans, the maximum loan allowances, noted above, still apply.

What are the rules for repaying my 401(k) loan?
In order to be compliant with the 401(k) loan repayment rules, you’ll need to make regularly scheduled payments that include both principal and interest, and you must repay the loan within five years. If you’re using your 401(k) loan to buy a primary residence for yourself, you may be able to extend the repayment period.

What if I lose my job before I finish repaying the loan?
If you leave or are terminated from your job before you’ve finished repaying the loan, you typically have 60 days to repay the outstanding loan amount.

What happens if I don’t comply with the 401(k) loan repayment rules?
Failure to follow the 401(k) loan repayment rules may result in tax penalties in addition to a 10% early withdrawal penalty.

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 $100,000	50% of your vested value
$10,000 or less	$10,000

Pros and cons of 401(k) loans

Advantages of a 401(k) loan	Disadvantages of a 401(k) loan
Getting a 401(k) loan is generally a quick, easy process	Money 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 amount	If 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 default	If 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 lender	You 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 early	You can’t deduct loan interest payments for tax purposes

Withdrawals from a 401(k)

401(k) hardship withdrawals
If you find yourself facing dire financial concerns and need cash urgently, your 401(k) plan may offer a hardship withdrawal option. Unlike a 401(k) loan, you won’t have to repay the money you take out, but you will owe taxes and potentially a premature distribution penalty on the amount that you withdraw. In addition, IRS 401(k) hardship withdrawal rules state that you may not take out more money than what is needed to cover your hardship situation.

In order to qualify for a 401(k) hardship withdrawal, your plan administrator must offer this option (not all of them do) and you must be facing an “immediate and heavy financial need.” Approved 401(k) hardship withdrawal reasons include:

Postsecondary tuition for you or your family

Medical or funeral expenses for you or your family

Certain costs related to buying, or repairing damage to, your primary residence

Preventing your immediate eviction from or foreclosure of your primary residence

If you experience a financial hardship from a circumstance not on this list, you may still be able to qualify for a hardship withdrawal, so check with your plan administrator.

In-service, non-hardship withdrawals

This type of withdrawal is only allowed under certain plans and is mainly used by those who would like to explore other investment options. Learn more about in-service distributions. An Ameriprise financial advisor can provide more detailed information on in-service 401(k) distributions.

Pros and cons of withdrawing money from your 401(k)

Pros	Cons
You’ll get access to cash quickly	You’ll be taxed on the amount that you take out
	If you’re under 59.5 years of age, you’ll be subject to a 10% 401(k) withdrawal penalty
	It may affect your long-term retirement savings goals

Withdrawing vs cashing out your 401(k)
Withdrawing money from your 401(k) is not the same thing as cashing out. You can do a 401(k) withdrawal while you’re still employed at the company that sponsors your 401(k), but you can only cash out your 401(k) from previous employers. Learn what do with your 401(k) after changing jobs.

401(k) loan or withdrawal - is it a good idea for me?

Taking money out of your 401(k) plan is a big decision that can impact your savings progress and long-term retirement goals. If you’re contemplating this option, consider connecting with an Ameriprise advisor. They’ll work with you to carefully weigh the risks, costs and benefits.

Can I roll my 401k out while still employed?

Most people roll over 401(k) savings into an IRA when they change jobs or retire. But, the majority of 401(k) plans allow employees to roll over funds while they are still working. A 401(k) rollover into an IRA may offer the opportunity for more control, more diversified investments and flexible beneficiary options.

How do I cash out my 401k?

By age 59.5 (and in some cases, age 55), you will be eligible to begin withdrawing money from your 401(k) without having to pay a penalty tax. You'll simply need to contact your plan administrator or log into your account online and request a withdrawal.

Can I close my 401k before retirement?

If you withdraw funds early from a 401(k), you will be charged a 10% penalty. You will also need to pay an income tax rate on the amount you withdraw, since pre-tax dollars were used to fund the account. In short, if you withdraw retirement funds early, the money will be treated as income.