I have just been laid off. Can I use my 401(k) for living expenses now and report it as income next year?

Personal Finance, 401(k)
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5 weeks ago
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No and yes.

No. You can't if you withdraw 401k money directly. If withdrawn this year from your 401K it must be reported as income this year.

Yes. You can use a work around that may work for you (see the caveat below). You can instead take a 401K loan this year - a loan is not income.  If you need to withdraw it next year, you can stop making payments to your 401K loan in the New Year and it automatically becomes a distribution from your 401K and therefore taxable next year.

CAVEAT: If the 401K is held by the employer that laid you off (this is highly likely) you will not have access to their 401K loan plan. There is a workaround but you will need to work with an advisor that is knowledgeable on individual-401K plans (sometimes also called solo plans). Before you go through this effort make sure that you know the limits - the loan is limited to 50% of your total 401K to a maximum of $50K.

This is not recommended since you are using your future retirement assets to support a current need BUT it has helped some clients bridge their finances until they develop their own business or land a new position.


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