As you may already know, you must meet certain requirements, as outlined in the 401(k) plan document, to be considered eligible to receive a distribution from the plan.
Your employer or plan administrator will provide you with a list of the requirements.
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.
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.
Assuming you are eligible to receive the distribution and the amount is rollover-eligible, you may instruct the 401(k) plan to process your distribution as a direct rollover to an IRA.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: You won’t get the full balance.If the custodian does not make this indication, you may file IRS Form 5329 to claim the exception.Unemployment is a scary thing in this tight job market.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.If you do choose to roll it over, I recommend executing a trustee-to-trustee transfer.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.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.