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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March 2017
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If you've been laid off, you'll have access to your retirement account funds. You will not be able to take out a loan like you could have when you were an employee. While it would be best for you to use other funds from savings or even home equity line of credit proceeds, you may access your 401(k) to fund your living expenses.

How much this costs you really depends on your age. If you're under age 59 1/2, you'll likely have to pay income taxes and have a 10% early withdrawal penalty.

If you use some of the funds to help pay for medical insurance premiums, you'll likely be eligible for an exemption of the 10% early withdrawal penalty.

If you're over age 59 1/2, you won't have to deal with the penalty. If you're under age 59 1/2 you can also avoid the penalty by arranging to take out 'substantially equal periodic payments' over the next five years. This is known as the 72(t) rule. You can check out IRS.gov or speak to your tax preparer for more information.

But in all cases, your distributions will be counted as income in the year of the withdrawal. You may want to budget for taxes by having the 401(k) or subsequent IRA custodian take out a percentage for federal and state income taxes with each distribution. Otherwise, you may not have sufficient funds to pay the full tax bill when you file your next tax return.

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