I Lost My Job. What Should I Do With my 401(k)?

Dear Dr. Don, I lost my job three months ago, and I'm wondering what will happen to my 401(k). My employer has a policy of fully matching an employee's 401(k) contributions. Do they still have to match my contribution? And how do l collect from my 401(k) so that l can survive until l can get another job?

Thank you,

-- Tony Taxable

Dear Tony, I'm sorry to hear that you're having trouble landing a new job. Since you're no longer contributing to your former employer's 401(k) plan, it's no longer making matching contributions. It's possible, however, that your former employer will make its matching contributions at the end of the year. If that's the case, they may still owe you a matching contribution depending on how the plan documents are written. But the plan may also be structured so that you don't receive the company match if you're not an employee at the end of the year. Check with the plan administrator if you're not sure.

If you separated from service during or after the year you turned 55, then you can take money from the account without owing the 10% penalty tax for early withdrawals. However, you'll still owe income taxes on the distribution of the tax-deferred income.

You can also avoid the 10% penalty tax by receiving payouts structured as an annuity. They're called 72(t)/(q) distributions for the part of the Internal Revenue Code that covers these distributions. The payments must be made at least annually, though they can also be monthly. They are based on either the life expectancy of the plan participant or the joint life expectancy of the participant and the plan beneficiary. The payments under this exception, with certain exceptions such as death or disability, have to continue for either five years or until the former employee reaches age 59 ??, whichever period is longer.

You can also do a trustee-to-trustee (or direct) transfer from your former employer's 401(k) plan to a rollover individual retirement account. By doing the trustee-to-trustee transfer, you avoid mandatory withholding of 20% of the account balance. Once in the rollover IRA, you could take money from the account that's not subject to mandatory withholding and essentially have a 60-day loan before you would have to reinvest that money into another IRA investment to avoid any penalty or tax obligation.

You should talk with a tax professional if you're still in doubt about what to do.

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