Should I take money out of my 401(k) while I am unemployed?

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Short version
Who it's for
What to do
Your options
Beliefs checked
Questions to ask

The short version

If you can cover your costs another way, such as unemployment benefits, leaving your 401(k) alone for now avoids the income tax on a withdrawal, and the 10% additional tax if no exception applies. The IRS says most retirement plan distributions (money paid out of a plan) are subject to income tax, and that a withdrawal before age 59½ carries an additional 10% tax (the early-withdrawal penalty) unless an exception applies.

If other money will not cover your costs, look first at what the IRS exempts from the 10% additional tax, such as the rule of 55 or up to $1,000 for an emergency. The rule of 55 means leaving your job during or after the year you turn 55, and the IRS lists it for workplace plans such as 401(k)s but not IRAs (individual retirement accounts). Apart from the emergency amount, expect 20% to be withheld (held back for tax before the money reaches you) from money paid to you.

On a $25,000 withdrawal that counts fully as income, the IRS's 10% comes to $2,500 on our arithmetic, before any income tax.

One caution: the IRS exceptions differ by type of account. So check which kind of account your money is in before you move or withdraw it.

Who this is for

You are out of work, your savings are running down, and you are wondering whether to use your 401(k), or how to limit the taxes if you do.

What to do this week (our advice)

File for unemployment benefits if you haven't, since only about half of eligible US workers claim them, according to a working paper posted by Washington State's Employment Security Department (option 1).
List each retirement account you hold and its type (401(k), other workplace plan or IRA), because the IRS exceptions differ by type.
Write down your age in the year you left your job, and check it against the IRS age-55 exception for 401(k)s (option 2).
Ask your plan administrator (whoever runs your 401(k) plan) five things (see the questions further down):
- whether you can take a partial withdrawal, meaning only part of your balance;
- whether it offers the $1,000 emergency withdrawal;
- how much of your balance is vested (owned by you);
- what happens to any loan you have;
- which dollar limit it uses to pay out or move a small balance without your consent.
Then answer any notice the plan sends you.
Before any withdrawal, work out the 10% additional tax, the income tax and the 20% withheld on the amount. Use your own expected income for the year, because the IRS warns that if a withdrawal is subject to the 10% additional tax, withholding may not be enough (option 3). IRS Topic 558 points to Publication 505 for withholding and estimated tax, and a tax professional can work out the income tax.
Before moving 401(k) money into an IRA, weigh two exceptions that depend on the type of account. The IRS lists the age-55 exception for qualified plans such as 401(k)s but not IRAs. The IRS lists the exception for health insurance while unemployed for IRAs but not qualified plans (see the two beliefs checked below).
If you do move the money, ask for a direct rollover to the new plan or IRA, meaning the plan sends the money straight there instead of paying it to you. The IRS says withholding does not apply to a direct rollover, and does apply to a payment made to you.

Your options

1. Leave it alone and use other money first

What happens. You don't touch the 401(k). You live on unemployment benefits, savings or severance for now.

What it gives. No tax or penalty from a withdrawal, and the money stays saved for retirement, unless you have a 401(k) loan outstanding or a small balance (see the questions further down).

What it gives up. You need other money to live on. Unemployment benefits may be worth checking if you have not claimed them. Only about half of eligible US workers claim them, according to a November 2025 working paper posted by Washington State's Employment Security Department.

What the evidence says. Hsu, Matsa and Melzer found that unemployment insurance helps the unemployed avoid mortgage default, and estimated that its expansion during the Great Recession prevented more than 1.3 million foreclosures (American Economic Review, 2018).

2. Take only money the IRS exempts from the 10% additional tax

What happens. You withdraw only under one of the IRS's listed exceptions to the 10% additional tax (the penalty) on early distributions.

What it gives. Cash without the 10% additional tax.

The rule of 55: the IRS table of exceptions lists separation from service (leaving your job) during or after the year you reach age 55, for qualified plans such as 401(k)s, but not for IRAs.

The emergency withdrawal: the same IRS table lists one emergency personal expense distribution per calendar year, after December 31, 2023. In that IRS table, the most you can take is $1,000, or the part of your vested balance above $1,000 if that is less, for both workplace plans and IRAs. IRS Notice 2024-55 says this distribution is for unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The same IRS notice says a plan does not have to offer it. If your plan does not offer it, that notice says you can count a withdrawal your plan does allow (an otherwise permissible distribution) as your emergency withdrawal.

Set payments over time: if you want to draw money gradually, the IRS also lists a series of substantially equal periodic payments (set payments, at least once a year, based on life expectancy). From a 401(k), the IRS says these payments must begin after you leave the employer.

What it gives up. The emergency amount is at most $1,000. These IRS lists are exceptions to the 10% additional tax only, not to income tax. IRS Notice 2024-55 says an emergency personal expense distribution is still counted as income, and the IRS says most retirement plan distributions are subject to income tax.

The IRS says equal periodic payments must continue for at least 5 years or until you reach 59½, whichever is longer, except in death or disability. The IRS also says they can't be rolled over (moved into another retirement plan or IRA).

What the evidence says. IRS pages word the age-55 exception differently. The IRS table says during or after the year you reach 55. IRS Topic 558 says after you separated from service with your employer after reaching age 55. So if you left in the year you turn 55 but before your birthday, confirm with your plan.

The IRS table of exceptions gives age 50 instead for public safety employees of a state or local government in a governmental plan. That IRS table's footnote also gives age 50 for certain other public safety workers, including federal firefighters and air traffic controllers.

Gap: IRS Topic 558 ties the age-55 exception to leaving "your employer", but the IRS pages we read do not say outright whether it covers only the plan of the employer you left or also a 401(k) from an earlier job, so confirm with your plan or the IRS before you rely on it for an older account.

3. Take a regular early withdrawal and pay the tax

What happens. You take money out before 59½ with no exception. You owe income tax plus the 10% additional tax on the part that counts as income.

What it gives. Cash now, from money you already have.

What it gives up. A share of what you take out, and less cash up front than you asked for.

The IRS says a retirement plan distribution paid to you is subject to mandatory withholding of 20% for federal income tax. On $25,000, the IRS's 20% comes to $5,000 on our arithmetic, so $20,000 would reach you. That $5,000 is a payment toward your federal income tax, not an extra charge. An IRS example of a 401(k) withdrawal reports the amount withheld as taxes paid.

Separately, IRS Topic 558 says the additional tax is 10% of the part of the distribution that counts as income. On that same $25,000, if all of it counts, the IRS's 10% is $2,500 on our arithmetic. IRS Topic 558 also says that if your distribution is subject to the 10% additional tax, your withholding may not be enough. In that case, Topic 558 says, you may have to make estimated tax payments. Gap: we could not find a reliable source on what federal income tax rate would apply to your withdrawal, or on state income tax on a withdrawal; a tax professional or your state's tax agency can tell you.

Your plan may not let you take out only part of your balance. In 2024, 43% of plans permitted terminated participants (people who have left the employer) to take partial ad hoc distributions (taking out part of the balance when you choose), up from 16% in 2015 (PlanAdviser, reporting Vanguard figures). Gap: we could not find a reliable source on how much a withdrawal now would reduce your retirement money, or on how people who withdrew fared compared with those who did not.

What the evidence says. 8% of non-retired adults had tapped retirement savings, by borrowing or cashing out, in the prior 12 months (Federal Reserve survey, Economic Well-Being of U.S. Households in 2024). The same Federal Reserve report says non-retirees who experienced a layoff were more likely to have tapped their retirement funds.

If you change your mind, the IRS says most payments you receive before retirement can still be rolled over (deposited in another retirement plan or IRA) within 60 days of receiving them. The IRS says that to roll over the full amount you must use other funds to make up for the 20% withheld.

Two popular beliefs, checked

"The rule of 55 lets me take penalty-free money from any retirement account"

No: the IRS lists it for workplace plans such as 401(k)s, not for IRAs. The IRS table of exceptions to the 10% additional tax lists separation from service (leaving your job) during or after the year the employee reaches age 55 as available for qualified plans such as 401(k)s, and not for IRAs. So if you plan to rely on it, check before rolling 401(k) money into an IRA.

"If I'm unemployed, I can use retirement money for health insurance without the penalty"

From an IRA, under conditions: up to what you paid for family health insurance, after 12 weeks unemployed and receiving unemployment compensation in the year of the withdrawal or the next; from a 401(k), this IRS exception does not apply. The IRS table of exceptions lists health insurance premiums paid while unemployed as an exception to the 10% additional tax for IRAs, but not for qualified plans such as 401(k)s. The IRS sets conditions on it: the exception covers distributions equal to the amount paid for family health insurance by someone who was unemployed for 12 weeks and received unemployment compensation in the year of the distribution or the next year.

Questions to ask yourself

Do I have a 401(k) loan outstanding? If you do, it may come due when you leave. The IRS says a plan's loan terms can require that it be repaid immediately or treated as in default when your employment ends. Your account balance can then be reduced to pay it, which the IRS calls a plan loan offset. The IRS treats an offset amount as an actual distribution. The IRS's 401(k) guide says any taxable amount that is not rolled over must be included in income in the year you receive it. If the offset comes from failing to meet the loan's repayment terms because you left your job, happens within 12 months of your leaving, and relates to a loan that met the tax law's loan requirements right before you left, the IRS lets you roll it over until your tax return due date, including extensions, for the year of the offset, instead of 60 days. An offset that does not meet those terms falls under the IRS's general rollover deadline of 60 days.
How much of the balance is mine? The IRS says your own contributions are always 100% vested (owned by you). The IRS says employer contributions to a 401(k) follow the plan's vesting schedule. That schedule, the IRS says, can range from immediate, to 100% after 3 years of service, to a share that increases with each year of service. The IRS also says amounts that are not vested may be forfeited (lost) when the account is paid out, for example on termination of employment.
Could my plan pay out or move a small balance without asking me? Possibly, if the vested part of your balance (the part that is yours) is $7,000 or less. The tax code, section 411(a)(11), says a plan must get your consent to pay out immediately a vested balance whose present value is more than $7,000. The SECURE 2.0 Act raised that tax code figure from $5,000, for distributions made after December 31, 2023. IRS Publication 560 (2025), Retirement Plans for Small Business, gives the same $7,000 limit on paying out a benefit without written consent. IRS Notice 2024-3 says the law permits a plan to increase its limit up to $7,000, from $5,000. By our reading of that IRS notice, $7,000 is a top limit a plan may adopt. Three IRS pages for plan participants still say $5,000, which does not match: the 401(k) general distribution rules, for consent (last reviewed or updated January 2026); the rollovers page, for moving money to an IRA (May 2026); and the termination of employment page, for when an employer may require you to move it (August 2026). Gap: we could not find an official statement explaining why these three pages say $5,000 while the tax code says $7,000. The IRS's rollovers page says a plan may pay a balance of $1,000 or less to you without your consent. That IRS page says that in most cases 20% is withheld, and that you can still roll the money over within 60 days. The IRS's 401(k) guide says that if a distribution over $1,000 is made and you don't choose to receive it or roll it over, the plan must transfer it to an individual retirement plan (an IRA). The same IRS guide says the plan must notify you in writing. Money moved to an IRA this way may lose the age-55 exception, because the IRS table lists it for 401(k)s and not for IRAs. If your vested balance is $7,000 or less, ask your plan which limit it uses. Answer any notice it sends by choosing where the money goes.
Could a hardship withdrawal help? Maybe not. Gap: we could not find a reliable source on whether a plan will give a hardship withdrawal to someone who has already left the employer; ask your plan. The IRS says a plan may, but does not have to, allow hardship distributions, which are for an immediate and heavy financial need. The IRS says hardship distributions are subject to income tax unless they consist of Roth contributions, and may also be subject to the 10% additional tax. The IRS says you can't repay a hardship distribution to the plan or roll it over to another plan or an IRA.

How we checked this: this page is the output of a rigorous research pipeline run with AI tools: every factual sentence rests on a finding checked against the source's own words, and a person approved the page before it went up. How we check our facts. Updated November 12, 2026. This page is general information, not legal, tax or financial advice.