401(k) Tips

Can I access money in my 401(k) if I am unemployed?

If you have been laid off unexpectedly, you may consider tapping into your 401(k) to pay your expenses. Here are the various ways to access your 401(k) money if you are unemployed.

3 min read

When you lose your job and you are out of savings, you will need to find a way of getting money to pay your piling expenses. While taking a credit card debt may be an option, taking a loan when you don’t have an income is a bad idea. The best option may be to withdraw money from your 401(k) to meet your needs.

If you are unemployed, you may qualify to make penalty-free 401(k) withdrawals to pay your expenses. You can withdraw the money as substantially equal periodic payments, which allows you to take equal distributions for a period of up to five years or until you turn 59 ½, whichever comes earlier. Also, if you are age 55 when you become unemployed, you can make penalty-free withdrawals from your 401(k). You will owe income taxes on the 401(k) distributions you take.

How a 401(k) works

If your employer offers a 401(k) plan, you will be allowed to join and make pre-tax contributions to the plan. The contributions are made through payroll deductions, where the employer deducts your contributions directly from your salary and deposits the funds in your IRA. You may also receive a 401(k) match on the contributions you make up to a certain limit.

If you want to make a 401(k) withdrawal, you must wait until you attain age 59 ½ to make penalty-free withdrawals. However, some employers may allow hardship withdrawals before 59 ½ if you have an immediate and heavy financial need like medical expenses, education expenses, or to prevent foreclosure. Early withdrawals before 59 ½ attract a 10% penalty and ordinary income taxes at your tax bracket.

How to withdraw money from 401(k) when you are unemployed

When you are fired or let go by your employer, and you have depleted your retirement savings, you may need to get another source of money to meet your expenses. A 401(k) may be a good alternative to get money in the short term.

Here are options you can use to access your 401(k) money:

Substantially Equal Periodic Payments (SEPP)

If you are not yet 59 ½, you can decide to take substantially equal periodic payment (SEPP) to avoid incurring penalties on the withdrawals. SEPP is a method of distributing funds from a 401(k) or other retirement accounts through equal annual distributions spread over a period of up to five years or until you turn 59 ½, whichever comes earlier. Once you reach 59 ½, you may stop taking the withdrawals or adjust the penalty-free withdrawals.

When determining the SEPP distributions, you can use three different methods to calculate the distributions. These methods include amortization, annuitization, and the required minimum distributions method. Each method gives a different annual distribution value, and the amount remains unchanged every year. If you want to change the method for calculating the SEPP amount, you can only change it once in your lifetime.

Age of 55

If you are at least age 55 when you become unemployed, you can make penalty-free withdrawals from your 401(k) account. As long as you are not working for the employer, you can start taking distributions from your 401(k) when you turn 55 or after, regardless of the reason why you quit. If you have other 401(k)s left with former employers, you can also make penalty-free withdrawals at age 55.

401(k) hardship withdrawals

The IRS permits 401(k) plans to allow hardship withdrawals if a participant is facing an immediate and heavy financial need. A hardship withdrawal is only approved if you have exhausted all other avenues, and you can only withdraw the amount needed to satisfy the need. Also, you can only use the hardship withdrawal for the specified need. For example, if you need $5,000 to pay for unreimbursed medical expenses, you cannot withdraw more than $5,000 nor use the funds for any other purpose.

Some of the expenses that may qualify for a hardship withdrawal include medical expenses, funeral expenses, college tuition, preventing foreclosure, buying a primary residence, etc. In some cases, your employer may require you to provide documentation to prove the hardship that you are facing. If the employer approves the hardship withdrawal, the distribution will be subject to income taxes and a potential 10% penalty if you are younger than 59 ½. 

Can you borrow against your 401(k) if you are unemployed?

If you are unemployed and you had a 401(k) with your former employer, you won’t be allowed to borrow from your old 401(k). Since you are no longer an employee of the company, it means that you won’t receive further paychecks from the company. Hence, the former employer won’t be able to deduct loan payments from your paycheck.

If you want to borrow against your retirement savings, you can transfer the 401(k) money to Beagle. Beagle unlocks your 401(k) money, allowing you to borrow up to 50% of your retirement money or a maximum of $50,000. You will be allowed to borrow against your retirement savings at 0% net interest, and the loan payments go back to your retirement account.