Getting to my 401k funds early, if I am laid off.

My 401k is currently inaccessible to me. I am employed, and my employer’s rules restrict me from getting anything more than about 20-25k from it as a 48-month loan.

The rest is off limits.

If I were laid off at 45 years of age after 20 years of service, and I just chose to retire now, I would have to pay a penalty and all taxes on the 401k, which more or less means that I would pay about 40 cents on the dollar… giving up 40% of the 401k. By waiting til I was 65 (or whatever elder age it is now), I’d still have to pay taxes, but would avoid the penalty. It’s likely taxes would be higher, so who knows what the actual rate would be.

But, essentially, once free of my employer via a layoff, if I choose to take my 401k and not roll it over into another account (Roth, Roth IRA, etc, whatever), then that’s my business, is it not?

I can take some time, go to school… maybe ease into some low-pressure, non-corp America hell hole.

Is my 'But" scenario a reality (above)?

Your OP is a bit confusing. It is not just “your business” - the IRS will also be a part of it.

You must pay income tax for any withdrawal, employed or not - younger than 59 1/2, a 10% penalty as well (There are a few severe hardship exceptions - but none are very happy scenarios).

IMHO, early withdrawals are a bad idea - the few I know who have done them greatly regret it.

FRIR (From what I’ve read):
[li]You pay a flat ten percent penalty to the IRS for cashing out early.[/li][li]The cash out it taxed as ordinary income in the year you cash out. In other words, if you cash out $50,000, you pay the $5,000 (10 percent) penalty, and the full $50K is taxed as well. So you end up paying a double tax on the ten percent you will never see.[/li][/ul]
The age factor may play a role. There is the IRS 72(t) rule worth looking at, although cashing out at 40 would be painful.


By ‘my business’, I mean that after paying the IRS, it’s my business if I want to use it and enjoy it. Aside from that being a bad idea because I’d be sucking up retirement funds, what I am asking is: I am not forced to put my 401k into another account… am I? I can pay penalty/taxes and go about my merry way?


Yes, as far as I understand it.

I don’t understand what you mean in the OP by “My 401k is currently inaccessible to me.” What do you mean “inaccessible”? It’s NOT inaccessible. It is YOUR money, and you can take whenever you want, as long as you realize that you’ll have to pay taxes like Duckster and jasg wrote.

I missed a way you can avoid the penalties - if you must withdraw early, get advice on a complex process called SEPP - “substantially equal periodic payments”. Under this scheme, you start regular withdrawals (amount determined by balance and life expectancy) and continue for 5 years or 59 1/2 - whichever comes last).

Yes, if you get laid off, you can take all that 401k money and spend it on hookers and blow, and as long as the IRS gets their taxes (+10% penalty), no one will stop you. But a few disembodied voices on a message board will try to dissuade you.

Also, if you want to actually retire early, you can generally do that without paying penalties. You roll your 401k over into an IRA, then start taking Substantially Equal Periodic Payments (SEPP). There are a few ways to calculate them, but basically, you have to take out an amount each year that corresponds to the actuarial tables and the size of your account. So, if you have $100k in your IRA and you’re 45, actuarial tables show you’ll probably live another 30 years or so, so you take about 1/30th of the initial amount out the first year. That’s adjusted based on an expected interest rate and some other stuff, and there are several different formulas you can use, but that’s the gist of it.

You have to keep doing the SEPP for at least 5 years or until you’re 59.5 years old (whichever comes first - not last as jasg said). If you don’t, the IRS will stomp on you for penalties and back taxes. Talk to an accountant.

Absolutely. As long as you get the IRS taken care of you can blow it all on pussy & beer if that suits your fancy! :smiley:

Actually, you may be able to withdraw the money without even paying the 10% penalty up front, but you’ll still owe it **and **the regular income tax on it at the end of the year. I don’t recommend doing this as I was recently in your exact position and I made a dumb mistake (on top of having to withdraw from my 401K at all). I mistook the 10% penalty to be part of the normal, yearly withholding tax (just paid early) and included it in that box on my 1040. Doubly unfortunately the IRS didn’t catch my mistake so I did it two years in a row! I suddenly found myself owing over $5000 in back taxes. Oops! :eek:

No, it’s not for the taking. There is no way to get the money, unless I want a small loan.

If you no longer work for the company, penalty free withdrawals can start as early as 55. Consult your tax expert.

In some Company 401k, the employee may not take early withdrawals.

Dudes- do NOT ever take an early withdrawal with a penalty. Ever.

(Bolding mine)

Under 72(t) jasg appears correct.

Sorry, jasg, and everyone else for spreading bad information. I have rechecked my sources and I was incorrect.