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UNEMPLOYED! Should I Cash Out My 401k?

Unemployment is a scary thing in this tight job market. It’s tempting to look at that 401k plan you amassed over the years at your last employer as nice cash cushion while you get back on your feet and figure out what to do. Before you make any rash moves, though, you should carefully consider the consequences of making such a distribution:

Income Taxes
You won’t get the full balance. Your employer must withhold 20 percent of your plan balance to send to the IRS to cover income tax on the withdrawal. In addition, you will be liable to pay the remainder of any income tax due by April 15th of the year following the tax year in which you make the withdrawal.

Unless you are age 55 or older, you will also need to pay a 10 percent early distribution penalty. Worse yet, this additional 10 percent is calculated based on the entire withdrawal – not just what you receive after taxes. So you will have to pay part of that penalty on money you never receive. Note that this age is 55, not 59 ½. This provision applies to those over 55 who have left their company. If you have not left your company, the 10 percent penalty will apply until you turn age 59½.

Exceptions to the 10 Percent Rule
The IRS waives the penalty on early withdrawals from 401k plans if you execute a rollover to an IRA or other qualified retirement plan, or you are over age 55 and have left your employer. For some public safety employees, that cutoff is age 50). If you have medical bills that are more than 7.5 percent of your adjusted gross income, the IRS will also waive the penalty on enough distributions to cover the remainder of the bill. Note that you don’t have to itemize your deductions to take advantage of this provision.

If the IRS levies your retirement account, you will pay income tax (duh!) but you will be exempt from the 10 percent penalty on the withdrawal the IRS forces.

Advantages of IRAs
IRAs, or Individual Retirement Accounts, offer a similar list of hardship exceptions to the 10 percent penalty, but with two notable advantages: With IRAs, you can also make penalty free withdrawals to cover college expenses, and to purchase a home. You may not feel like purchasing a home while you’re unemployed. But if you were sitting on the fence about going back to school and you have the money, you won’t pay a penalty if you tap an IRA to do so.

IRAs also allow you to make penalty free withdrawals to avoid foreclosure or eviction. To take advantage of these provisions, though, you will have to execute a rollover to an IRA. You cannot try it from your 401k, or you will run into the 20 percent withholding and 10 percent penalty issue.

Section 72(t)
Section 72(t) allows you to avoid the 10 percent penalty by spreading your income from your 401k over the rest of your life expectancy. This can provide a nice cash cushion, though you do lose a bit of tax-deferral benefit on any amounts you take as income.

The Unemployment Trap
There is one significant trap that may affect the unemployed, however: Any withdrawals you take from a 401k plan could offset unemployment compensation. Be sure to take a careful look at your state’s plan rules before you take anything out of a 401k, or you could render yourself ineligible for unemployment compensation altogether – just when you need it most. For this reason, I would be very wary indeed of taking any 72(t) or any other withdrawal unless I did not qualify for unemployment compensation.

Rolling it over
If you do choose to roll it over, I recommend executing a trustee-to-trustee transfer. You can have the 401k plan send you a check directly, but then the clock is ticking. You have only 60 days to complete the rollover. If you screw up, you will pay taxes and penalties on the whole thing at once. Have your 401k plan send the money directly to the IRA custodian. You’ll avoid the 20 percent withholding and you won’t have to worry about slipping up.

Roth IRAs
If your income will be unusually low this year because of the job loss, it may pay to consider rolling part or your entire 401k into a Roth IRA. You pay your income taxes now, but your tax brackets might be the lowest they will be for the rest of your life. From that point, your Roth IRA grows tax free.

Final Thoughts
If you have a lot of itemized deductions, don’t sweat the income taxes on small withdrawals. The penalty is bad, but if you can avoid the 10 percent penalty, and then take a taxable withdrawal to pay for an expense that’s tax deductible – like educational expenses directly related to your profession, or job search expenses – then you really have a wash.

…or find your next job in our CAREER section!

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32 Responses to UNEMPLOYED! Should I Cash Out My 401k?

  1. Pingback: UNEMPLOYED! Should I Cash Out My 401k? | View Vitaver … | Free Job Search Info

  2. Richard Jensen says:

    Before cashing out, consider a “self-loan”. This is a short summary. Also check with your financial advisor.

  3. Loraine Heller says:

    Cashing in a 401k is tempting, but according to experts, should be avoided at all costs. It has penalties associated with it that can cost you a bundle in money, time, and nerves. Find some financial advice, either at your bank or from an independent financial adviser. Don’t make a move on your 401k until you’ve gotten expert advice.

    • cltaylor says:

      So what if you have not had a job since 2011, have zero income, and need to leave your current living situation?? My money is simply held hostage while I try to get from age 48 to 55 with no job and no where to go ??

  4. 401k plan says:

    I really like this post. It is sharing good information.

  5. marguerite seigler says:

    reallocate some to investment and some to survival.

  6. Tim Blackwell says:

    I’m 57 and my wife has cancer and been fighting it for 3 years and costs a lot in co-pays gas to another hospital. We were told by our company that I work for that a lot of people will be in a permant lay off and I believe I will be one of them. So no insurance or income except my wife’s disabilaty check and I owe $6,000.00 on a loan from to my 401k or 501k which they take payments out of my paycheck everyweek and right now we are having to pay some bills with a credit card to get by. So starting Jan next year I may have nothing but a car, truck and house that’s paid for but will have big bills for my wife’s cancer treatments that are high and will be hard for me to get another job no where close to what I make now and the benefits. I need case so what do I have to do to get my saving from the 401k to keep my wife going to get treatments and to cover our monthly bills?

  7. Hello, Tim, and thanks for writing!

    Very sorry to hear your wife has been battling cancer. I certainly wish you the best.
    This situation is very fact-dependent, for your individual situation, so I would have to say go speak with a qualified financial planner, preferably with a CFP or the lesser-known but excellent ChFC (Chartered Financial Consultant) designation, preferably someone with some experience with 401(k)s for the specifics.

    But in terms of general information, here are some issues for you to be aware of – and maybe they’ll help you avoid the nastier penalties.

    First of all, hardship withdrawal provisions with 401(k)s vary. If you were all in an IRA, it’s pretty clear that you can take penalty-free withdrawals to pay for medical expenses exceeding 7.5 percent of your income and to pay health insurance premiums, among other hardships. Not every 401(k) allows for it, though. It depends on your plan, so you’ll have to check with your plan administrator.

    If you are about to leave the company, though, you can access your plan assets without the 10 percent penalty anyway, provided you have left the service of the company, since you are over 55. 401(k) rules allow you to make withdrawals without the early withdrawal penalty once you turn 55, provided you’ve left the company.

    If you haven’t left the company yet, you can roll over to an IRA, but only if the plan allows for in-service distributions. Not all 401k plans do, so check with your plan administrator.

    You still have the loan outstanding, but that’s not a huge deal, since you’re trying to pull money out anyway. If you don’t pay back the loan, it gets treated as the distribution you were going to take anyway.

    There are so many variables here that depend on your plan and on the other assets you may have that it would be worth going to a local professional planner for advice for your specific situation, though.
    There’s some additional work to be done in making sure health insurance coverage continues after you’ve left the company. How you do so depends on your state. Some states let you convert your group policy to an individual one. In other cases, your only option is COBRA. And then things change again with the Affordable Health Care Act, but not until 2014, and only if the next Congress doesn’t repeal the law.

    I wish you the best, and a speedy recovery for your wife.


  8. Tim Blackwell says:

    Thank you Jason for your help…..

  9. Lisa says:

    I quit my job. I only have $100 in my former companies 401K. I am still unemployed after a month and could really use the cash. Is there a penalty and IRS taxes for such a small sum withdrawal?
    I thought I heard that if the amount was less than $499.00 there is no taxes.

  10. Justin says:

    I want to cash in my 401 k and my boss told me no only when I die I could get it I work at a hostile job I don’t think I can work at this place much longer the verbal abuse and there is no human resource he runs it all and I can’t get a honest answer I got paper work but no bank about my 401 k?? Help

  11. Hello, Justin! And thanks for reading!

    If you leave your employer, and it is, indeed, a 401(k), you can roll your plan over to an IRA and access it that way. If your employer objects, I would introduce him to the enforcers at the Department of Labor.

    If you don’t leave your employer, he has a perfect right to restrict your access to the 401(k). Different companies design their plans different ways, and some specifically choose not to allow for ‘in-service distributions.’

    If you are in a non-qualified deferred compensation plan, though, there could be some strings on it. Or you could be in a life insurance policy. So I’d want to be very sure of your terms before going off half-cocked. Make sure it’s a 401(k) you’re in.

    It’s rare, but it’s also possible that your employer is not depositing your contributions but keeping them for himself. would be a very big deal and potentially expose your employer to some serious jail time.

  12. Gerry Cardnot says:

    Hi. If I have a loan and quit my job, I now know I have 90 days to pay it back? If I decided to cash out the rest of the money only for 45 days and then put it back in another 401k account, do I need to pay taxes still? Is there a time frame so it doesn’t become taxable?


  13. Hello, Gerry,

    I’m not a tax expert, but I wouldn’t push it. I would suggest paying back THAT 401(k) that you took the loan from. I don’t know if the IRS will charge you taxes if you contribute that money to a diffferent plan, but why take the chance? If you contribute the money to a new plan, you would use up part of of your contribution limit for the year. Maybe all of it. Why do that, when you can simply pay off the loan, and then, now that you’ve left the company, roll the money over to an IRA or to your new employer-sponsored plan.

  14. Rachel thomas says:

    I got fired from my job in July, now I am having a hard time paying bills, buying food things I really need. I want to pull out my 401k but I owe the irs will they take all of the money I need from my 401k

  15. Jatin Shah says:


    I was laid off Dec 2012 last year. I haven’t been lucky enough to find a job as I am on immigrant visa. Due to hard times, I withdrew approx. 10K from my 401k. Needless to say they withheld 20% and gave me 8k. While I not asking if I made the right decision, I feel that was the only option I had to keep my family going. I have left the country now in June 2013. Do I still file tax returns, and if so do I show just the income from 401k? If I file taxes, do I get head of household and personal exemption (with 1 dependents)?
    I would really appreciate good advise.

  16. Tony says:

    Well this may sound like double trouble. I’m 42 and recently diagnosed with congestive heart failure. I have been in and out of the hospital several times and have racked up some serious bills. I collected an insurance policy from my late mother $20,000 last year and paid $15,000 to cover less than half of my medical bills. I had to quit my job and was on SDI. I lost my insurance 3 months later so I no longer collect. I owed the State (CA) back pay from 2010 for over payment for unemployment insurance ( yes I should have paid them off first) the SDI went straight back to the state for collections.I currently owe EDD $5,000. I wanna cash out my 401k with only $2600. Is there anything I can do to collect my money without the state collecting all of it. I understand I made a huge mistake with EDD but I have no income and looking for full time work in a new career field or if must go back to school. I need advice please I’m in a bad spot and want out! thank you

  17. Hello, Tony! Neither I nor Vitaver give tax or legal advice, but here are a few issues to look at given your situation. You should run these by a professional licensed in your area.

    First, if your money’s in a 401(k) the State can’t touch it. It’s in a noncollectable account with pretty close to airtight asset protection. Even the IRS has a hard time cracking open 401(k) accounts. The most they can normally do is get a charging order against income. Your 401(k) balance is in an ERISA protected plan. It’s not even your money. It’s held in trust for you. Which is what makes it so difficult for even governments to collect money WHILE STILL IN A 401(K) plan.

    But the second the funds are released, they are fair game for government collectors.

    Is there a charging order in place already? That means the state has obtained a court order to divert income released to you to them instead, but they can’t force the 401(k) to release funds.

    If there IS a charging order in place, then the state can, in fact, intercept the funds, but only if you have them distributed.

    You might be able to make a deal with the CA Department of Revenue and get them to remove the charging order as part of that deal. How do you go about that? Make sure all your returns are current, and contact the California Franchise Tax Board. Here’s the form you’ll eventually have to fill out, with more information on it.

    You could also speak with an attorney about filing for bankruptcy, which would halt collections for a time. However, there are potential downsides to this course of action depending on your overall situation, including the assets you have, exemptions, whether you qualify for Chapter 7, etc.

    Next, check any hardship provisions in the 401k plan. Not all 401k plans allow for hardship distributions You may be better off rolling your balance over to an IRA first. This way, you get around the 20 percent withholding requirement. The 10 percent penalty for early distribution doesn’t apply for either 401ks or IRAs if you are completely and totally disabled. You’ll still owe income taxes but your income seems pretty low if you’re living on SDI, so the income taxes shouldn’t amount to much.

    Hope that helps!


  18. Patricia says:

    I am about to be terminated, fired. I have a Roth 401K that I have had for 3 yrs. I may need the money to live on. I do not have another job. What is my best option? Are there penalties for early withdraw on a ROTH 401K? What would you advise?

    • Hello, Patricia!

      Sorry to hear you’re about to be walking the plank. If it’s inevitable, play for time. Time before you walk the plank and time before you have to begin liquidating that designated Roth 401K.

      Normally, you only have to pay income taxes and penalties or EARNINGS in the Roth money. BUT… there’s a catch. To qualify for that favorable tax treatment, the money has to stay in the account for 5 years.

      Meanwhile, you might look at rolling over your Roth 401(k) balance into a Roth IRA. Why? So you can qualify for the 401(k) hardship exemptions. So you won’t have to pay the penalty for money you spend on rent so as not to be evicted, money you spend on COBRA or health insurance premiums, etc.

      That’s a bit of a simplification. Just be aware of the 5 year rule for Roth accounts and all the hardship rules that apply to IRAs that don’t necessarily apply to 401(k)s.

  19. Jay Vee says:

    I was laid off last February and currently on my state’s (PA) unemployment benefit, I have been looking and religiously applying for job openings but still no employers are giving me a chance not even a phone interview. Soon my unemployment benefit will run out unless congress pass the extension, I have a son that will start college next school year. I did all the FAFSA and my son applied for the Stafford loans put all of this together we are still $20,000 short for his first year. I’m 53.5 years old and have some money in my former employer’s 401k and IRA, I was denied a home equity loan due to lack of income (my wife is also unemployed) and will apply for PLUS loan (I may get denied for that one too) My son really wants to go to this school and I love him so much to tell him no. What advise can you give me to support his education plus my wife and I? Shall I tap in to my 401k now, borrow from credit cards, sell my house and rent an apartment? How can I reduce penalties and interest fees? I really appreciate any advise you can give us.

    • Hello, and thanks for writing!

      You’re in a tough spot. But I’d be very, very reluctant to drain a retirement account for the purpose of funding a child’s education, for this simple reason: Lots of places will lend your child money to go to school. He can work more. He can put it off and join the military and go on the Post 9/11 GI Bill, which is a great deal. He can get an ROTC scholarship, which is what I did.

      No one is going to lend you or your wife any money to retire on, and you don’t have those creative funding options.

      I would also not put money on credit cards. You aren’t buying an asset, in this case, so the math doesn’t work out. This is one of those situations where you’ve got to do your thinking with your head and not with your heart. Thinking with your heart is a luxury you can’t afford, it seems.

      Now, it could be you have enough in your 401(k) and IRA plus home equity to do it all, easily, But I don’t get that sense. If you aren’t sure, go to a financial planner and have them do a retirement income needs assessment.

      If you DO decide to tap retirement funds, do it from an IRA, rather than a 401(k). They don’t do the automatic withholding and you qualify for hardship exemptions (see the article above). That may not be the case in an IRA.

      It is true, you can avoid the 10 percent penalty for early IRA withdrawals if you use the money to pay for your son’s education. But that alone doesn’t make it a good idea. You will still need something to live on in retirement. Your son may not be in much of a position to help, anyway.

      Indeed, if he’s 20,000 short, it sounds like he’s wanting to attend an expensive private university. There’s nothing… NOTHING wrong with going to a state school and saving a ton of money. You want the social capital of a Columbia, Harvard or Yale? The money you save on tuition will buy some very nice golf club and yacht club memberships!

      Now, here are some exceptions to my reasoning: Your son is a semester away from a degree in Petroleum Engineering and has a six-figure job offer already waiting for him in the North Dakota shale fields as soon as he graduates, etc. Or you have a home in San Francisco worth $5 million and you can sell it, move to Huntsville, Alabama and live in a $70,000 house perfectly comfortably and live on the interest of invested capital.

      Unless something like this applies, I do not like the option of liquidating retirement funds yet in your shoes, for anything other than your basic living expenses and health insurance.

      Hope that makes sense!


  20. crystal says:

    I’m in the same boat as most of these people I have been on my job over 17 year last year I had to leave on medical leave and I had two operations just say one day I had one and then next day I had another one. Been fighting to get back to work when I get cleared to go back I have to leave there is a restriction on my lifting bending and other things. Well I was cut off of STD in April was the last month have been fighting ever sting the second week in April to get back to work and on LTD. Was told that I still have to wait till maybe next week to find out if I get my LTD. I can’t pay rent or buy food and can’t afford to stay in the room my family is giving me can’t put gas in my car let alone anything else I have maxed out credit cards to try and pay off things well that ran out also in April. I can’t pay for the two storages that I have with all my things in them I may lose every thing if I don’t get money coming in soon. I don’t believe that I will ever be able to go back to doing what I was and I still need back surgery. I have 401k and need to pay off loans on that and other things too. I can’t pay my premium and may lose mind and my mothers insurances and then how will be get berried if we pass. I just don’t know what to do any more I just don’t know help me what should I do except keep my faith in the Lord that things will turn out all right . I know things happen for a reason so what’s mind was just trying to get my health better and it’s not! JUST DON’T KNOW WHAT TO DO I OWE EVERY ONE! CAN’T ASK ANYONE FOR MONEY ANY MORE I NEED HELP WHAT SHOULD DO? CASH IN AND GET PENALIZED A LOT FOR TAKEN CLOSING OUT 401K I DON’T KNOW WHERE TO TURN NEED MONEY LIKE APRIL!

  21. Darren says:

    I live in NJ and found out their closing the business soon and laying off most employees. My question is if I cash out my 401k while I’m still employed will it affect my unemployment when I’m eventually let go..

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  26. ang says:

    hi, quick question..I owe the IRS and have been making monthly payments to them but am struggling now to keep up with that payment and my other bills. I do have the money in my 401k but it’s not available for me to withdrawl it completely unless I leave the company ( and yes I’m aware of the taxes, penalties if I did so)–my question is, can the IRS levy my 401k to take care of this debt?is it available to them even tho it’s not available to me unless I quit? I’m kinda hoping the answer here is YES because I know 401k Levies exist–I just can’t get anyone to answer me as to whether or not they can’t take my full amount…would you know?

  27. James Marhevka says:

    I have a 401k traditional account that my former employer of two years ago still has. He wrote me a check when I left putting his name on the check as a trustee. He still has it. I am still unemployeed, I have about 16k in tax deductions and no income at all. My question is this, if I just take it out, close the account of about 28k, with all these deduction will I get most of my taxes back? Right now I earned .21cents last year, he, my former boss has not invested it in anything it is just sitting in his aacount with him listed as a trustee. I have had an accident settlement I have been living off of so up until this point I havent needed the money. Now I do. He hasnt invested it in anything since I left, he even wrote me the check when I left with his name on it as a trustee but because I am unemployed, the bank I have wouldnt open an IRA for me saying I couldnt contribute to it. Simply asked, 28k If taken with 0 income with me having 3 deductions, home taxes, two children in college and misc deuctions after the initial taking of taxes and and early withdrawl penalty, will I get all or most back with my filed taxes? Last if I do take it and invest it in property can I use it to buy a property to open a business? BTW I have also filed For Disability, I havent been awarded it yet but I do have a rating of about 25% permanant disability. Feedback is appreciated and YES I know that taking it isnt the ideal thing however earning .21 cents isnt even worth my money being tied up. Thank you

  28. Michelle says:

    I am on STD for the last six months and it will run out on July 8th. On July 9th my LTD would kick in if approved, but it is under review and I have applied for social security disability benefits. I have been with my company for over 8 years, and I have just been told this week that I will be released based on the needs of the business. We managed to keep our head above water for about 4 months with our savings, but this with all the medical bills we quickly started drowning. We have filed bankruptcy it has not been discharged yet and we are still in the process of making payments to the attorney.

    I was under the impression before that I would be on Leave of Absence but not I am being told I am going to be fired. I have a 401k that would be allowed to be cashed out and with most likely with no penalty due to disability. The 401k would help us catch up on the vehicle and house. It would help with the medical bills and prescriptions that I am required of and I do not know if and when my LTD or Social Security Benefits will kick in. My question is if the 401k is released due to being released, will I lose my money due to the bankruptcy?

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