Unemployed, cash running out. How to tap into my 401k?
August 25, 2018 9:48 AM   Subscribe

So I've been out of work for a while after a layoff, and the only money I've got left to live on at this point is the 401k from the old job. What are my options?
posted by bartleby to Work & Money (12 answers total) 3 users marked this as a favorite
Don't take out 401k money, you can't afford it. Get on unemployment if you haven't already.
posted by KMoney at 10:05 AM on August 25, 2018

How old are you? There’s a penalty if you’re younger than 59 1/2. There are taxes regardless.

This seems like a good summary.
posted by FencingGal at 10:17 AM on August 25, 2018

Oh, should have mentioned, unemployment has run out, along with cash savings.
Under 59 1/2, aware of penalty, just looking for best approach.
I'm at a "Well I guess I'll just die, then ¯\_(ツ)_/¯?" point moneywise (as well as spiritually), but asking advice to minimize the damage.
posted by bartleby at 10:23 AM on August 25, 2018 [1 favorite]

I've done this. There's a significant penalty, so take that into account. The only option that I'm aware of, if you're no longer at the job, is to close the account entirely. They'll take the penalty-fee out and send you a check. (The exact details of the process will be available through your plan holder - Principal or Fidelity or whoever.) The check will be taxed as income, which, if you're not making any other money, is probably not your biggest concern.

Everyone will tell you not to, but man, if it's that or losing the roof over your head, go ahead and do it. Me, I keep an old 401k un-rolled-over into my current one just in case I ever have to do it again.
posted by restless_nomad at 10:25 AM on August 25, 2018 [8 favorites]

I was going to drop the same link. (My top google result.) It mentions that using your 401K money to prevent foreclosure or eviction may be a bad strategy. (Because you can keep your 401k balance even through bankruptcy.) An acquaintance of mine spent down her retirement savings and lost her condo in bankruptcy anyway. It would have been better for her to have bailed out sooner and kept the money. It also mentions borrowing from your 401k and paying it back if you do find work. That's better than paying the taxes and penalties. Your withdrawal counts as income the year you take it.

I took IRA money out during the downturn and since I had expensive health insurance back then, I ducked the penalty with that provision of the law about having heavy health expenses as a percentage of income.
posted by puddledork at 10:28 AM on August 25, 2018 [2 favorites]

Depending on the options determined by your former employer you may be able to borrow against your 401(k) without taking a distribution, or to take only a partial distribution without cashing the whole thing out. When I did this after my unemployment ran out, our cash reserves were too low, and our HELOC balance was too high, I didn’t have any of those options, because my former employer hadn’t made them available. What I had to do was roll my 401(k) into an IRA, at which point I had more options. In the rollover I could (and did) opt to take a partial cash distribution and invest the rest. My 401(k) had been at Fidelity, and they ended up being the most useful option for my IRA, so I did the whole thing with one phone call. They could even keep my fund mix for the money I left in the IRA. If you’re moving to another company in the process you may or may not be able to split the distribution, but you will need to speak with people to set it up.

But yes, there are hefty tax penalties for taking an early distribution, so don’t do this if you have any other choice. Between losing the future value of the retirement account and the taxes and penalties, you’re losing a lot more than the face value of the cash distribution. Anything you roll into an IRA and don’t take early distribution on maintains its tax basis, and depending on your situation once you find work again you may find it useful to have an IRA anyway.
posted by fedward at 10:28 AM on August 25, 2018

Do you have credit cards with available balances? I'd live on credit for as long as I can before hitting the retirement savings. As stated above, retirement funds are safe in bankruptcy. If you have to run up 30K in credit debt surviving then claim bankruptcy that is fine. That is what bankruptcy laws are for.
posted by COD at 11:20 AM on August 25, 2018 [5 favorites]

Far as I know, declaring bankruptcy doesn't put food on the table or convince your landlord to let you hang around. If you have zero income, your debts aren't your big problem. Once you've got a job and something coming in, then you can worry if you've incurred debts.

(That said, the credit card thing is not a bad thought if it's an option. Also, one of my other brokeass tricks was paying off my car with a credit card. The CC then couldn't repossess my means of getting to work.)
posted by restless_nomad at 1:27 PM on August 25, 2018 [3 favorites]

Something to keep in mind if you choose to do this - technically you have 60 days from when you withdraw money from a 401K to put it in a corresponding retirement fund (usually a rollover IRA). So if you take (for example) 10K out and happen to get a job the day after, on day 59 you can put 10K back in an IRA and you pay no taxes or penalty. The phrase to google is "indirect rollover" or "60 day rollover rule". It gets complicated when they take taxes out of your 401K immediately and you end up deciding to get an IRA, but there are plenty of internet resources on that.

Basically you're borrowing from your 401K. You'll hear all the time "only do this if you can be sure that you'll pay the money back in 60 days", but if you don't it just turns into a withdrawal with taxes and penalties, and you were going to do that anyway so there's not much downside.

Short version: If you do this, and happen into a source money within 60 days, you can retroactively undo it for any or all of what you took out (doesn't need to be all) by opening an IRA.
posted by true at 3:06 PM on August 25, 2018 [2 favorites]

You don't have to withdraw everything at once. You can take as many small withdrawals as you like, but for planning purposes, you should check with HR at you plan provider to find out what kind of lead time or delay is involved for a withdrawal.
posted by JackFlash at 3:18 PM on August 25, 2018

I did this. Took a partial withdrawal after being unemployed for awhile and I wasn't eligible for unemployment. They take 20% for taxes. So if you requested $1000, they would take that much out of your IRA but you would only get a check for $800.

The website of your IRA will have details and you can probably do it all online. It took me less than a week to get my check.
posted by mulcahy at 3:24 PM on August 25, 2018 [1 favorite]

If you are 55 or older in the year you are separated from your job, you can take a penalty-free (but not tax-free, sorry) withdrawal from your company's 401k plan. Google 'Age 55 Rule for 401k' for more information.
posted by mama penguin at 4:05 AM on August 26, 2018 [2 favorites]

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