No, you can’t. Any amount withdrawn from your 401(k) account must be treated as ordinary income for the year in which the money is taken out.

Any money you take from a 401(k) plan must be reported as ordinary income in the same year that you made the withdrawal.

Exceptions to the Rules

There are exceptions to the rules on early withdrawals from retirement plans. The IRS allows them in certain very specific cases. This is not a break on the income tax owed. It's a break on the penalty.

For example, first-time homebuyers and people who have huge unreimbursed medical expenses may be eligible, depending on the type of retirement plan they participate in.

You may also be eligible to take a loan from your own account, in certain cases.

Tax and Penalty Liability

If you have no option but to withdraw money from your retirement account, you can still roll over the amount to an IRA within 60 days of receiving the check without incurring taxes and penalties. This is known as an indirect rollover.

When you take the withdrawal, the plan administrator must withhold 20% for federal taxes. State tax withholding may also apply.

If you can’t make that rollover happen within the 60-day limit and you are younger than 59½, you must pay all the income taxes due plus a 10% early withdrawal fee.

If you can’t roll over the money within 60 days but want to avoid the mandatory tax withholding, you should have the amount processed to a traditional IRA as a direct rollover. This means that the money will go directly from one plan to another without passing through your hands.

Then you can take the distribution from the IRA, which allows you to waive withholding. You will have to pay the taxes when you file, though. You may want to check with a tax professional to help you decide whether you should have taxes withheld to satisfy any requirements for paying estimated taxes.

A Last Resort

Withdrawing from your retirement plan should be a last resort, as you not only lose part of your nest egg but also damage its power 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 haven't left your job, you may be able to take a loan from your 401(k) instead of withdrawing the money. That can be a better option.

Another Option

If you have left your job, you may be eligible for unemployment insurance in your state. See the U.S. Department of Labor 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 or financial counselor for some additional financial guidance.

Advisor Insight

Steve Stanganelli, CFP®, CRPC®, AEP®, CCFS
Clear View Wealth Advisors, LLC, Amesbury, Mass.

You may access your 401(k) to fund your living expenses. However, [if you are no longer working for that employer] it must be a withdrawal. You will not be able to take out a loan, as you could have when you were an employee, but will instead have to pay what you take back by the due date of your federal income tax return that year.

How much this will cost you depends on your age. If you’re 59½ or older, you won’t have to deal with the 10% early withdrawal penalty. If you’re under 59½, you’ll have to pay the penalty, unless you use the funds for medical expenses that total more than 10% of your gross income. Then you’ll likely be eligible for an exemption. You can also avoid the penalty via the 72(t) rule: receiving “substantially equal periodic payments” over the next five years.

In all cases your distributions will be counted as income in the year of withdrawal, and you’ll owe tax on them. It may help to have the 401(k) custodian withhold a percentage for taxes with each distribution.