Can You Use Your 401(k) Without Penalty Before Retirement?

If you’re looking for start-up capital for your new business, take a peek into your 401(k). Those funds can be used in a variety of ways, though withdrawing money often brings penalties with it. Can you use your 401(k) without penalty before you retire? Let’s look at your options.

What Is a Penalty?

401(k) accounts mature slowly and are designed to be used for retirement. If you withdraw money from that account before you turn 59½, you must pay a penalty fee, often 10 percent of the amount you withdrew. You’ll likely also have to pay federal and state income taxes on the money you took out.

Penalty-Free Exceptions

The IRS makes a few exceptions to their penalty rule for extenuating circumstances. People younger than retirement age can withdraw from their 401(k) while avoiding penalties in the following situations, among others:

  • Medical expenses. If you are hit with medical bills that total more than 7.5 percent of your adjusted gross income for the year, you can make a penalty-free withdrawal.
  • Family circumstances. Those who are required by the courts to provide money to an ex-spouse, children, or any other dependents can avoid the 10-percent penalty.
  • Disability. If you become totally and permanently disabled and are unable to work, you can make early withdrawals from your 401(k).

If none of these extenuating circumstances apply to you, you still have options for avoiding that penalty.

Alternate Methods

Are you still looking at your 401(k) as a viable source of funds for your small business? You don’t have to withdraw directly from your plan or cash it out to access that money. Think about a loan or a rollover for your 401(k) small business financing.

401(k) Loan

Borrow against your 401(k) to avoid taxes and penalties—as long as you repay the loan in full within five years. You’re allowed to borrow up to either $50,000 or half your vested balance, whichever amount is smaller.

Rollover for Business Start-Ups (ROBS)

To transfer your existing 401(k) funds into an account your business can use, talk to a financial advisor about setting up a ROBS. You must register your company as a C corporation and set up a 401(k) program in its name. Transfer the funds from account to account, and now your business has plenty of capital!


To remain eligible for a ROBS, you must provide your employees the option to participate in the company’s 401(k).

You can use your 401(k) without penalties before you retire! Your withdrawal or rollover just has to meet certain criteria. Be smart about your management of your 401(k), and the money can work for you for years to come.