Unemployment And 401(k) Withdrawal

by David Rodeck, Demand Media

If you have lost your job, you gain access to the money in your 401(k). However, you should only use this money as a last resort. A 401(k) withdrawal could result in taxes and penalties. In addition, this withdrawal might prevent you from getting government assistance while you're unemployed.


The 401(k) is meant to be a retirement account. You aren't supposed to take money out of your plan until you reach age 59 1/2. However, if you lose your job, you can make retirement withdrawals penalty-free if you are 55 or older. If you are younger than 55, you are making an early withdrawal. The IRS charges income tax plus a 10 percent penalty on most early withdrawals, even if you are unemployed.

Penalty Exceptions

There are a few situations when you take out your 401(k) money penalty-free. You can use your 401(k) money to pay medical bills that exceed 7.5 percent of your income for the year. You also can take out your 401(k) money penalty-free if you needed to stop working because of a permanent disability. Lastly, if you die, your heirs can take out your 401(k) money penalty-free. Unfortunately, if you want to use your 401(k) account for anything else while unemployed, you'll need to pay the 10 percent penalty.

Unemployment Payments

Taking money out of your 401(k) also could prevent you from collecting unemployment payments. Unemployment is a state-run program, and each state has different rules. Some states consider 401(k) payments to be work income that disqualifies you from being truly unemployed. This can lead to a reduction or a delay in your benefits. For example, New Jersey reduces your unemployment payments by half of your 401(k) withdrawals. Before taking money out of your 401(k), check with your state's Department of Labor to make sure your withdrawal won't impact your unemployment payments.


If you don't need to take money out of your old 401(k) while unemployed, you should still move the account. Since you've left your job, you won't be able to continue investing in your 401(k) account. If you roll over your balance into an individual retirement account, you will be able to continue saving for retirement. You won't owe any taxes for making a rollover, because you keep your money in a retirement plan. Taking this step will make it easier to manage your retirement savings when you start working again.

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