A:

Any amounts withdrawn from your 401(k) plan must be treated as ordinary income for the year the amount is distributed from your 401(k) account. Consider the following:

  • If any portion of the withdrawal is rollover eligible, the plan administrator must withhold 20% for federal taxes if the amount is paid to you instead of being processed as a direct rollover. State tax withholding may also apply.
  • If you want to avoid the mandatory federal (and if applicable, state) tax withholding, you should have the amount processed as a direct rollover to a Traditional IRA and then take the distribution from the traditional IRA where you can waive withholding. However, you may want to check with your tax professional for assistance with determining whether you should have taxes withheld to satisfy any requirements for paying estimated taxes.
  • As you may already know, withdrawing from your retirement plan should be a last resort, as you not only reduce the amount in your nest egg, but you also lose the benefit of having the amounts continue to accrue earnings on a tax-deferred basis. The impact can be quite significant and could put you behind with your retirement program.
  • If you have no option but to withdraw amounts from your retirement account, you can roll over the amount within 60 days of receiving the check.
  • You may be eligible for unemployment insurance in your state. See the Department of Labor's website for details. This could provide sufficient income until you find another job and negate the need to tap into your 401(k) plan.

You may want to talk to a retirement/financial counselor for some additional financial guidance.

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. I am a first-time home buyer. If I take a distribution from my 401(k) to purchase ...

    As you may already know, you must meet certain requirements, outlined in the 401(k) plan document, to be considered eligible ... Read Answer >>
  2. What is a 401(k) rollover?

    Find out what a 401(k) rollover is, when you might want to roll over a 401(k) and whether a direct or indirect rollover is ... Read Answer >>
  3. Will I have to pay taxes on my 401(k) plan if I quit my job?

    Quitting your job does not trigger a taxable event for your 401(k) funds unless you elect to cash out your account and take ... Read Answer >>
  4. Can I roll over the 401(k) money from my old job into my new company's plan?

    Roll over your old 401(k) to your new employer's 401(k) or other retirement plan. Check with your new plan to ensure eligibility. ... Read Answer >>
  5. What happens to my 401(k) plan if I switch jobs?

    Roll over your old 401(k) plan to your new 401(k) plan or an IRA, cash it out, or leave it alone. Which option is right for ... Read Answer >>
  6. Can I take my 401(k) to buy a house for my children?

    Find out how you can use your 401(k) savings to fund the purchase of a home for your children, including the basics of standard ... Read Answer >>
Related Articles
  1. Retirement

    Best Ways to Roll Over Your 401(k)

    When you leave a job, you have some decisions to make about what to do with your 401(k). Here are some choices.
  2. Retirement

    The Complete Guide To Retirement Planning For 50-Somethings: Retirement Nest Egg

    Ideally, distributions from your retirement savings account would be deferred until you reach retirement age. However, extenuating circumstances may necessitate making withdrawals before then. ...
  3. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  4. Retirement

    401(k) Rollover: Roth IRA or Traditional IRA?

    Here are the pros and cons of choosing to roll over your 401(k) into a Roth IRA and a traditional IRA.
  5. Retirement

    A Guide To Rollover A 401(k) To A New Employer

    Here's exactly what you need to know.
  6. Retirement

    How Yearly Taxes on 401(k) Accounts Work

    Learn how your contributions to traditional or Roth 401(k) accounts are taxed, either in the year of contributions or at withdrawal, depending on the type.
  7. Taxes

    Retirement Planning For 30-Somethings: Deposits And Loans

    If you make a withdrawal from your retirement account and have the funds available to redeposit, you can redeposit (rollover) the amount within 60-days of receipt. This rollover will restore ...
  8. Retirement

    Avoid the Most Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules.
  9. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  10. Taxes

    10 Little Known Ways To Reduce Your 401(k) Taxes

    These clever strategies will help you hold onto your money – so you'll have more available for your retirement.
RELATED TERMS
  1. Rollover IRA

    A special type of traditional individual retirement account into ...
  2. Eligible Rollover Distribution

    A distribution from an IRA, qualified plan, 403(b) plan or 457 ...
  3. Withholding

    The portion of an employee's wages that is not included in his ...
  4. Rollover

    A rollover is when you do the following: 1. Reinvest funds from ...
  5. IRS Publication 515

    A document published by the Internal Revenue Service that provides ...
  6. Withholding Allowance

    An allowance an individual claims on a W-4 Form. A withholding ...

You May Also Like

Trading Center