Can I take money out of my 401(k)?
Taking Money from Your 401(k) Early
Is it okay to take early withdrawals from my 401(k)?
The short answer? You can — but it's not ideal.
Taking money from your 401(k) before retirement should really only happen when you have a compelling reason (or you qualify for an IRS exception).
That said, this money isn't actually "locked up" until 59½, despite what the financial industry may lead you to believe. Wonder why they use that terminology? Maybe because they'd rather you keep it there? After all, most financial firms typically earn a percentage of what stays in your account.
Here's the truth: accessing your retirement savings early simply comes with a price tag. And just like anything else in life, you need to decide if what you're getting is worth more than what you're giving up.
What's The Cost?
So what happens when you take money from your 401(k) before age 59½? Two things:
You'll pay regular income tax on whatever you withdraw.
You'll get hit with an extra 10% penalty tax on top.
(I'm focusing on traditional pre-tax 401(k) contributions here, since that's what most people have. Different rules apply to Roth accounts.)
Two important things to keep in mind:
You'll pay the income tax no matter when you take money out — whether you're 45 or 75.
If your employer matched your contributions, you already got a 100% return on that portion — which suddenly makes a 10% penalty look pretty small in comparison, doesn't it?
Let Me Break This Down
Let's put this in real terms. Say you've got someone with a $100k salary whose company matches 401(k) contributions, up to 3% of this salary. If they put in $3k, they immediately end up with $6k, doubling their money before the market even has a chance to do its thing.
Now imagine they're 45 and want a sabbatical to explore a career change. If they quit in December and take their withdrawal in January, they'll likely have very little other income that year. This means they'll pay a surprisingly low tax rate — potentially even lower than they would pay in retirement.
So really, we're just talking about that 10% penalty.
Does that change your perspective at all? Would you give up 10% if it meant finding work you actually enjoy? What if this new career paid better or made you so much happier that you didn't mind working longer?
Of course, I can't tell you what your best option is without talking to you, but under the right circumstances, not tapping your 401(k) early would be like choosing to stay in prison when you could pay a reasonable fee to walk free. Doesn't make much sense, does it?
The Hidden Cost: Missing Out on Growth
There's another cost worth considering: opportunity cost. When you take money out of your 401(k), that money isn't in the market growing for you anymore.
To withdraw, you have to sell investments. If those investments later go up in value, you miss those gains. So, if you pull out $50k and the market doubles over the next decade, you've essentially given up $50k in potential growth.
That sounds like a big deal, right?
But here's the thing — if taking that money out substantially improves your life while still leaving enough for retirement, it might be worth every penny. Many consistent 401(k) savers may have actually over-saved anyway. An early withdrawal might just be bringing things back into balance.
Let's Run Some Real Numbers
Here's a concrete example to bring this home: A 45-year-old has built up $300k in their 401(k). They quit their job in December 2024 and withdraw $50k in January 2025.
With $50k as their only income that year, they'd pay:
About $5,900 in income tax (11.8% effective rate)
$5,000 early withdrawal penalty (10%)
Putting roughly $39,100 in their pocket
Combined with other savings, this buys them a full year to figure out their next career move — one they might enjoy enough to work until 70 instead of feeling pressured to retire at 60.
If we assume an 8% average market return (reasonable for a diversified portfolio):
The original $300k would grow to about $1 million by age 60
The remaining $250k (after withdrawal) would grow to around $1.7 million by age 70
So, what's the real takeaway here? Maybe the key to a happy retirement isn't about how much money you've saved, but about finding work you don't feel desperate to escape from.
Perhaps that's something worth thinking about the next time you look at your 401(k) balance.
