Can I take money out of my 401(k) without paying penalty?


The company I work for just terminated their 401(k) plan and suggested employees roll their funds over to an IRA. My question is can I cash out say 20% (to pay off debt) of my balance without paying the penalty and roll the remainder over to the IRA account?

I have over a couple hundred thousand dollars in the 401(k) and would save over $600 a month in debt!

Thank You,



Hi Keith,

First, I want to caution you against this strategy. If you take money out now, you will have less money for retirement. If you can afford to pay off your debt without tapping into your retirement, that is the best strategy to pursue. There are several strategies to help you pay down you debt faster, e.g.,

That said, there are a few ways to get money out from your 401(k) without paying a penalty — you still have to pay taxes and your current rates though.

59 ½ or Older

The minimum age for taking cash out of your 401(k) plan without having to pay the early withdrawal penalty is 59 ½. If you are over that age, then you can take your money out and just pay your standard income taxes.


There are also several exceptions where you avoid paying the penalty (but you still have to pay income taxes). These include:

  • You die (but that’s not the case here)
  • You suffered from a qualifying disablity
  • You need money to pay for medical expenses
  • You are 55 or older and left your job

You can see more in depth explanation of the bullet points above heree: 6 Ways to Claim Your 401k Early and Penalty Free.

Substantially Equal Periodic Payments with Rule 72(t)

Last but not least, there is a rather complex rule that allows you to take substantially equal periodic payments for at least 5 years, or until you reach age 59½, whichever comes later. Once you’ve been taking the payments for 5 years and you’ve reached age 59½, you can discontinue the payments if you so desire. You can read more about it here: 72(t) Distribution Rules.

Obviously, this won’t work for you because it doesn’t allow you to take out enough money for what you want to do, but I included it here for the sake of completeness.

I hope this helps.


About the Author

By , on Nov 4, 2012
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Leave Your Comment (5 Comments)

  1. AM Greenwich says:

    You can also take money out for other hardships such as “Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence.”

  2. David says:

    If you can wait till after you are 60 years old it will benefit you in terms of tax deferred benefits. If you want to pay taxes on your money now and absolutely need the funds than pay the penalty and take your money but only do if you need to.

  3. Mary Kaplan says:

    I agree that it is never advisable to take money out of an IRA early. However, there are times when that is the only option you have. I’m glad there are some categories of emergency that don’t include paying penalties. Those types of catastrophic situations are the only ones that make using retirement funds early okay.

  4. I believe that it is never advisable to withdraw retirement fund unless you have a backup savings account that will support you on your retirement or if you are going to use the money in putting up a business.

  5. I wouldn’t ever take money out of a retirement vehicle until it’s penalty free. Future you will kick yourself for doing so! A couple hundred thousand dollars may sound like a lot now, but it’s not a lot when it’s your only income in retirement.

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