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

By Denise Appleby AAA
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Any amounts withdrawn from your 401(k) plan must be treated as ordinary income for the year the amount is distributed from your 401(k) account.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. Who is exempt from paying Social Security taxes?

    Learn about the groups of people who qualify for exemption from Social Security taxes, and explore the process of applying ...
  2. What is the difference between a fixed and variable annuity?

    Understand the difference between fixed, variable and indexed annuities, and read a brief summary of their respective risks ...
  3. What are the best ways to lower my taxable income?

    Paying taxes is an unavoidable obligation each year, but individuals and business owners can take advantage of various strategies ...
  4. How does the Canada Pension Plan (CPP) work, and what asset mix does it hold?

    Learn the difference between a chartered financial analyst and the Canadian pension plan. Explore Canadian retirement options ...
RELATED TERMS
  1. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  2. Medigap

    Also called Medicare Supplement Insurance, Medigap is health ...
  3. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  4. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  5. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  6. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...

You May Also Like

Related Articles
  1. Professionals

    Just Retired? No Better Time for a Second ...

  2. Professionals

    When Your Client's Retirement is Around ...

  3. Professionals

    A New Wake-up Call for Savers

  4. Professionals

    Retirement Bliss? Not So fast: When ...

  5. Professionals

    Multiple Accounts? Here's How to Calculate ...

Trading Center