An employee may engage in a savings plan that will allow a portion of their wages to steadily build up as a reserve of funds that will become available when they are retired. This plan is called a 401(k) plan if the employer sponsors it and invests the savings into its own securities or stock, and this money gets saved before it would be taxed. The employee is ordinarily disallowed from withdrawing funds from their 401(k) plan until six months after they have turned 59 years of age, however, and when it comes time to receive funds from the plan, it will be taxed at that time like wages ordinarily would.
However, if a person is between jobs, they may be unable to avoid having to draw on the savings currently in their plan in order to financially stay afloat until the next time they are employed. Since withdrawing from a plan before the age threshold incurs a penalty cost of 10% alongside the tax, however, one will have to choose which among multiple courses will be the least financially damaging in the long term.
A jobless person may attempt to transfer the contents of the 401(k) account into a rollover individual retirement account in accordance with IRS guidelines; doing this may prevent the funds from being taxed, resulting in more long-term money than otherwise. However, in order to withdraw from an IRA before the age threshold without incurring penalties on that end, the person must be able to demonstrate that they qualify for the privilege of making a hardship withdrawal without the penalty. Being disabled and having to make regular health insurance payments are among the particular qualifying factors.
For jobless persons underneath the age threshold that do not find making an IRA rollover transfer from their 401(k) plan viable, several other courses exist that can also avoid the withdrawal penalties associated with the age factor. For one thing, a jobless person - regardless of whether they left their job voluntarily or otherwise - can actually gain non-penalized access to their various 401(k) accounts' funds if they become jobless shortly before the age threshold. This period begins at the start of the numbered year in which the person becomes 55.
For persons younger than even that age threshold, however, the 72(t) provision defined by the IRS allows them to retrieve non-penalized funds from their 401(k) plans in the form of SEPPs. Standing for a Substantially Equal Periodic Payment, this method results in the person receiving a series of payments determined by their life expectancy and distributed over at least a five-year period; if this period does not last until the 59-years-and-6-months age threshold, it will extend itself until it does. Many factors in this process are complex enough that consulting financial advisors before choosing the distribution method and attempting to calculate the amounts to withdraw is heavily urged. The same SEPP procedure can also allow a person to withdraw funds from a rollover IRA.
As previously mentioned, only some hardship withdrawals made before the age threshold avoid the 10% penalty because of the personal circumstances necessitating the person's early withdrawal being particularly severe. In general, the IRS stipulates that generalized living expenses such as purchasing residences, pursuing education, and various medical needs are what one needs to prove to even be able to make a hardship withdrawal with the associated penalty. A person must show that their need qualifies as heavy because they do not have access to assets owned by immediate family that they can financially fall back on, and the person must wait until after having used up all of the loans they have been privileged to. Even granting all this, they must only withdraw as much as they immediately need, and they must continually prove their ongoing need to the company in order to withdraw more from their 401(k) plan.
Ideally, someone that is currently jobless despite not being at the legal age for retirement should not be in such financial dire straits that they must use some of their own retirement savings early, but the option exists and can be pursued with proper consultation by financial advisors.
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