Tapping 401(k) if you’re unemployed

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Q. I lost my job and I don’t qualify for unemployment. The only money I have is in my 401(k) plan from a long time ago. What do I do?
— Out of work

A. You’ve got options, but they’re not without long-term consequences.

There is a provision within the Internal Revenue Code that allows you to start taking distributions from your 401(k) plan before you reach age 59½ without penalty, said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna.

“This little-known section of the code, §72(t)(2)(A)(v), can be a real dandy if you happen to fit the requirements,” he said.

The code is commonly called 72-t.

The primary requirement is that you separate from service with the employer at or after age 55, Meckler said.

If you don’t meet the requirements, then any distribution prior to age 59½ will result in the 10 percent penalty being applied, he said. You’ll owe regular income tax on the money, too.

“You won’t be able to borrow from the plan since you are no longer an employee,” Meckler said. “If you don’t have any other sources such as a home equity line of credit, cash value life insurance or taking a loan from family or friends, then you may have to use the assets from the 401(k) plan.”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.