Will a 401(k) withdrawal hurt my unemployment claim?

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Q. I have about $2,800 in my 401(k) from a former job and I want to just take the money out. I’m employed but there are times when there’s not enough work. If I took this money out while I was employed, and then if I needed to open an unemployment claim, would the cashout affect my eligibility for benefits or cut down the benefits?
— Needing cash

A. There are considerations beyond a possible unemployment claim that you need to consider.

First is taxes.

Withdrawals from a 401(k) are taxed at your ordinary income at the rate for your tax bracket in the year you make the withdrawal, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.

“It is important to note that you may begin taking out money from a 401(k) account when you reach 59 ½ years of age or meet certain exceptions for withdrawals, but 401(k) withdrawals will be subject to a 10% penalty tax on top of the taxes if they are made before the eligible age,” Gobo said.

Now, unemployment.

“You will not need to claim a 401(k) withdrawal on your unemployment benefits, nor claim distributions on an IRA account,” Gobo said, citing the state’s website.

New Jersey unemployment claims are contingent on two main factors, he said.

First, unemployment insurance benefits are for people who lose their job “through no fault of their own,” such as an employer’s lack of work or company downsizing. If claims are filed due to misconduct or voluntarily quitting, benefits will be delayed or denied, Gobo said.

Weekly unemployment benefits are determined by all wages earned during your “base year period” of employment, Gobo said.

“The regular base year period consists of the first four of the last five completed calendar quarters before the week you filed an initial claim,” he said. “Your regular base year period does not include your 401(k) withdrawals.”

To be eligible in 2022, you must have earned $240 per week for 20 weeks or more in employment during your base year period or must have earned $12,000 in total in employment during your base year period.

“Depending on your age, there may or may not be a penalty on your withdrawals, but there will most definitely be tax implications,” Gobo said. “So by taking a full distribution of $2,800, it will be considered taxable income for this year whether or not you actually need the money this year.”

Another option would be to take the distribution when you actually need it. You can accomplish this by leaving it in your old company’s 401(k) until you do, or you can roll the 401(k) into a an IRA where you control the investment decisions and can take funds out whenever you want, “with perhaps less hassle than dealing with your former employer’s benefits department,” Gobo said.

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This story was originally published on Oct. 10, 2022.

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.