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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July 2017
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If you have been laid off, depending on the plan document (Summary Plan Description / SPD that you should get each year) describes how you can access your funds for hardships (taxable) distributions and possible plan loans (non-taxable if you repay the loan).  These distributions are subject to taxes (and you have a 20% mandatory withholding.  Also, if you were under age 55, you will pay a 10% penalty on most 401k plan distributions (note that the age is less than the 59 1/2 for IRAs).  For a loan, you must pay it back per a schedule.

For the most flexibility, especially if you are over age 59 1/2 (so you can avoid the 10% penalty), you should roll it into an IRA at your preferred brokerage house (I typically recommend Charles Schwab or Fidelity to clients).  Once it is in an IRA you have complete flexibility to take distributions for living expenses.  There is also NO mandatory withholding on IRA distributions, but if you pay no taxes until the next April 15th, you could have under-payment penalties.

General thoughts:

  1. If you are between ages 55 and 59 1/2, try to keep it in the 401k to avoid the 10% penalty.
  2. If you are above age 59 1/2 (and have no availability for 401k plan loans), roll it into an IRA for more flexibility.
  3. If you are under age 55, then roll it into an IRA for more flexibility.
  4. Note:  If you have employer stock in the plan, make sure to look into NUA  (Net Unrealized Apprecation) rules as there may be opportunities there.

If you have any more issues related to your layoff you need help with, check out my Layoff Survival Guide.

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