16 Jul Will we lose unemployment if we take a 401(k) loan?
Q. My husband was furloughed. I believe he’s getting the wrong benefit amount based on his salary but we haven’t been able to get through to unemployment. As such, we are thinking of taking a 401(k) loan to get by. Would a loan or withdrawal disqualify you from receiving unemployment?
A. We’re sorry to hear about your husband’s job.
If you believe he is receiving the wrong amount, there are several things to consider.
You didn’t say if he was a W-2 employee or a gig worker who receives a 1099.
The Department of Labor said when it ushered through many gig worker claims, they were approved at the lowest amount and will at some time in the future be asked for proof of income, and if benefits should be higher, they would receive back pay.
That process hasn’t started yet, based on experiences reported by our readers. So you may have to wait it out.
Another option is to file an appeal, though it may be too late for you, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
She said you can go to the unemployment website and click the drop-down menu that says “If You Already Filed A Claim” and select “Appeal a Determination” subject.
“It says that you would have needed to appeal within seven calendar days after delivery or within ten calendar days after the mailing of the determination,” she said. “There is a hyperlink to appeal online. You can also mail in an appeal.”
On the 401(k), retirement plan loans and distributions should have no impact on unemployment eligibility.
Under the CARES Act, you can take a loan of up to $100,000 or 100% of your vested account balance, whichever is less, from an existing 401(k) without the 10% early withdrawal penalty, she said.
You have the option to pay it back within three years, or pay the ordinary income taxes due over the same time span, D’Agostini said. You could also elect to pay the taxes this year in full if you are in a lower tax bracket than normal.
“You do meet one of the eligibility requirements for accessing these loans as you have experienced a furlough due to COVID-19 and therefore have experienced adverse financial consequences,” she said. “The loan must be taken in 2020. You do not need to take it out all at once.”
Also note that the CARES Act suspends the 20% mandatory tax withholding on early distribution that typically applies — but taxes will eventually be due.
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This story was originally published on July 16, 2020.
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.