Question about cashing out some of my 401K after I lose my job

[Lrak]

Hello. I was wondering if you could let me know if I am correct with this. I will be laid in April of this year. I currently have a 401K with an outstanding load on it. I will not be able to pay this back before I am laid off. I am going to use numbers here that are not actually mine. I have say $100,000 in my account. My outstanding loan balance is $25,000. I get laid off and then I should have a few options what to do with my 401K. I am assuming that the loan will go into default and be taken directly from my balance leaving me with $70,000 (includes 20% federal). At this point I want cash out another $30,000 (receiving $24,000 after 20% fed tax). The remainder ($40,000) I will put either in another employers 401k or an IRA. I am over 55 live in PA and will be laid off so I should not get hit with the 10% penalty at tax time. Am I correct with my scenario above or am I am missing something? Can I withdraw from my 401K the day after I lose my job?

[CarolC]

You should be able to do exactly what you shared and not be hit with the 10% early distribution penalty.  As long as you are 55 or older, you can make these distributions after you are laid off from your job.

The IRS states that the penalty is waived if "the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)."

The 1099-R issued by your employer next year may indicate that you received an early distribution and an exception does not apply.  You will need to complete Form 5329 to claim an exception.  You will select Code 1.

One thing to consider, generally Pennsylvania does not tax retirement plan distributions as long as the distribution is received after age 59 1/2.

Click the IRS link below for more information on early retirement distribution penalty exceptions.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...