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Any amounts withdrawn from your 401(k) plan must be treated as ordinary income for the year the amount is distributed from your 401(k) account.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. How do Pay As You Go pension plans work?

    Learn how pay-as-you-go pension plans are different than fully funded pension plans and why some government plans are running ...
  2. Who is eligible for a Teacher Retirement?

    Learn about the retirement option, the Teacher Retirement System, offered to teachers and other public school employees, ...
  3. What's the difference between a financial advisor and a financial planner?

    Seeking professional advice from a financial advisor may involve asking for financial help from a certified financial planner, ...
  4. What are the main benefits of a Locked-in Retirement Account (LIRA)?

    Read about the main benefits you can realize from transferring your Canadian pension funds into a Locked-in Retirement Account, ...
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. You need to be patient, diligent and perseverant to be successful at investing, but more importantly, you need to start early.
    Investing Basics

    Why You Should Start Investing Early? ...

  2. It can be great to live in the moment, but the actions and decisions you make now can greatly impact your sense of financial security down the road.
    Personal Finance

    How Do Americans Keep Minimizing Their ...

  3. Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
    Professionals

    Tips For Managing A Cash Windfall

  4. Retirement

    Planning Ahead for 2015's Tax Law Changes

  5. Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.
    Professionals

    Tips For Managing Inflation In Retirement

Trading Center