Can you take money out from your IRA or 401K if you are unemployed and need the money? (receive, claim)
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I am desperately looking for work and my unemployment benefits have been suspended pending an interview, but I am not sure how long the process will take.
I am not 55 yet, so I am wondering if I can take a few thousand(or more) out of my 401K to carry me through until my benefits get reinstated.
Is this considered a hardship? If I need money due to being unemployed, can I take some of my money out with no penalty?
Knowing that workers would resist putting aside money for decades with no chance to access it, Congress made provisions in the 401k rules to allow plan withdrawals in a limited number of hardship situations. These include:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
For funeral expenses.
Certain expenses for the repair of damage to the employee's principal residence.
But to discourage these early hardship withdrawals, in most all cases the IRS imposes a hefty financial penalty including a 10 percent early withdrawal penalty if you are younger than 59 1/2.
You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:
You become totally disabled.
You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
You are required by court order to give the money to your divorced spouse, a child, or a dependent.
You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
You are separated from service and you have set-up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
I am not 55 yet, so I am wondering if I can take a few thousand(or more) out of my 401K to carry me through until my benefits get reinstated.
Is this considered a hardship? If I need money due to being unemployed, can I take some of my money out with no penalty?
You are no longer employed.
Therefore, ask your employer, or its custodian, about your ability to do a a direct rollover of that 401k into an IRA. You should do this anyway, to gain control and avoid mandatory 20% withholding on withdrawals. Otherwise, if you withdraw from the 401k, the custodian, by law, must withhold 20% for federal taxes, which is not true when you make withdrawals from a rollover IRA.
Consider a rollover IRA at Fidelity/Vanguard/TRowePrice/Schwab and invest the money in a target date retirement fund if you don't know what else to do with it.
Once that is accomplished, you can withdraw from the IRA, without penalty or incurring a taxable event, provided you redeposit those funds into the IRA within 60 days. In other words, you are making a short-term loan to yourself.
Recent Tax Court decision, contrary to IRS guidelines, will only allow you to do a 60-day withdrawal/redeposit once a year, no matter how many IRAs you might have.
If you don't redeposit those funds, then you could be subject to a penalty, unless use this money for:
Quote:
Medical expenses. You can use IRA distributions to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income without incurring the early withdrawal penalty. The distribution has to be in the same year as the medical expense,
Withdrawals to Cover Health Insurance Premiums While Unemployed
This exception is limited to those who receive unemployment compensation for 12 consecutive weeks under any federal or state unemployment compensation law during the current year or the preceding year. Early IRA withdrawals taken during the current year are penalty-free up to the amount paid during the year for health insurance premiums to cover you, your spouse, or your dependents. How to make penalty-free IRA withdrawals - Tax Guy - MarketWatch
Any money you do permanently withdraw for above allowable medical expenses is taxable as ordinary income, but you do avoid the 10% early withdrawal penalty.
Last edited by Ariadne22; 03-11-2014 at 01:26 AM..
Further to this, withdrawal from 401k can affect unemployment benefits. In NY, if employer contributed at least 50% of the monies in a "pension," payments (i.e., withdrawals) may need to be reported when claiming benefits. NY handbook specifically references employer pensions where employer has contributed at least 50%. 401k's may fall into that category. You need to check with NY on that. A one-time lump sum withdrawal should only affect one week, but states vary in how they view this. You need to check w/NY on this.
So, if your benefits are reinstated and, meanwhile, you've made a 401k withdrawal, you would need to report that, or at least inquire about it.
This is another reason for doing a direct rollover of the entire account into an IRA. The states don't scrutinize IRA withdrawals, as a rule. You really should roll that 401k into an IRA.
Interesting .. I am unemployed and have been told that I can withdraw my 401k money to purchase a residence (another state) and also to use those funds to update the structure. I am also in the process of applying for unemployment benefits. 1. Will I be penalized for withdrawing the 401k monies ... 2. Will doing so affect my eligibility for unemployment benefits?
I'm from California and recently lost my job for over 11yrs and I decided to close my 401k, I took a lump sum on my 401k and I would like to know if that would affect my UI Benifits or EDD would permanently stopped my UI Benifits. Pls help..
I'm from California and recently lost my job for over 11yrs and I decided to close my 401k, I took a lump sum on my 401k and I would like to know if that would affect my UI Benifits or EDD would permanently stopped my UI Benifits. Pls help..
You would have been much better served to roll that 401k over into an IRA, and then withdraw. As it is, now CA will conduct an investigation on the amount of that 401k withdrawals attributable to employer. You won't lose your claim, but the weekly payment may be offset by the percentage of employer contribution.
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