401K - special tax break for unemployed?


J

John Smith

I'm between 50 and 55 years old and have been unemployed for a
year. 401K is now my last resort. Any way to avoid penalty or tax
when I withdraw from 401K? Thanks a lot.
 
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A

Alan

I'm between 50 and 55 years old and have been unemployed for a
year. 401K is now my last resort. Any way to avoid penalty or tax
when I withdraw from 401K? Thanks a lot.
Here are two exceptions you may qualify for.

1. If you are a qualified public safety employee, distributions made
from a governmental defined benefit pension plan are not subject to the
additional tax on early distributions. You are a qualified public safety
employee if you provided police protection, firefighting services, or
emergency medical services for a state or municipality, and you
separated from service in or after the year you attained age 50.

2. A distribution from a qualified retirement plan to the extent you
have deductible medical expenses (medical expenses that exceed 7.5% of
your adjusted gross income), whether or not you itemize your deductions
for the year.

You can find the full list of exceptions in IRS Pub 575:
http://www.irs.gov/publications/p575/ar02.html#en_US_publink1000226952

Please note that you should not confuse the exceptions for an IRA
distribution with the exceptions for a pension distribution. They are
not the same.
 
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T

Tom Russ

On 6/10/10 11:54 AM, John Smith wrote:> I'm between 50 and 55 years old and have been unemployed for a ....
Please note that you should not confuse the exceptions for an IRA
distribution with the exceptions for a pension distribution.  They are
not the same.
But presumably since the OP is unemployed, he should be able to roll
over the 401K into an IRA. And that would then qualify for the IRA
rules, right?

IIRC there is the "substantially equal payments" exception that would
allow penalty-free (but not tax-free) withdrawals. The OP would have
to continue the withdrawals until age 59 1/2 or for 5 years, whichever
is longer. And the payment schedule can't be changed once started
without penalty consequences.

There is no way to avoid regular income taxes on withdrawing from a
401K or IRA. Well, if some of the contributions were after tax
contributions -- not very likely -- then a portion of the withdrawal
might not be taxed.)
 

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