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It's possible that I'll be laid off in a few months.

Currently I have x + y in my 401k.

x = my personal contribution
y = my company match --> which is vested

Soon I'll make a fairly big personal, but important purchase. When I leave my job, I plan to withdraw my company's match. Plus I'm young, and have future earnings potential.

My logic is that I'd like to have the spare cash, plus I'll have my degree from an Ivy league school with solid work experience in software engineering.

Is there an ideal way to withdraw the company match 401k, or must I simply accept the 30% hit?

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Do you have any alternative from which you can withdraw without penalty? e.g. a Roth IRA? –  user102008 Dec 24 '12 at 20:30
    
I do have a Roth IRA. Is it preferable to withdraw fro my Roth IRA, and then roll over all of my 401k? If so, why? –  Kevin Meredith Dec 24 '12 at 22:04
    
Well, the principal of regular contributions (not conversions or earnings) to a Roth IRA can be withdrawn at any time without tax or penalty, so it can serve as an emergency fund. The main advantage would be no penalty. What you do with your 401k (whether you leave it as is, roll it over to a Traditional IRA, Roth IRA, or new 401k) is an unrelated issue. Another option is to take the best of both approaches -- take a loan from your 401k, but if and when you leave your company and you haven't paid it all back, withdraw from the Roth IRA to pay back the loan to avoid the penalty. –  user102008 Dec 25 '12 at 1:54
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2 Answers

up vote 4 down vote accepted

Why would you want to withdraw only the company match, and presumably leave your personal contributions sitting in your ex-company's 401k plan? Generally, 401k plans have larger annual expenses and provide for poorer investment choices than are available to you if you roll over your 401k investments into an IRA. So, unless you have specific reasons for wanting to continue to leave your money in the 401k plan (e.g. you have access to investments that are not available to nonparticipants and you think those investments are where you want your money to be), roll over part (or all) of your 401k assets into an IRA, and withdraw the rest for personal expenses. If your personal contributions are in a Roth 401k, roll them over to a Roth IRA, but, as I remember it, company contributions are not part of the Roth 401k and must be rolled over into a Traditional IRA. Perhaps this is why you want to take those in cash to pay for your personal purchase?

Also, what is this 30% hit you are talking about? You will owe income tax on the money withdrawn from the 401k (and custodians traditionally withhold 20% and send it to the IRS on your behalf) plus penalty for early withdrawal (which the custodian may also withhold if you ask them), but the tax that you will pay on the money withdrawn will depend on your tax bracket, which may be lower if you are laid off and do not immediately take on a new job. That is, the 30% hit may be on the cash flow, but you may get some of it back as a refund when you file your income tax return.

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+1 - very comprehensive answer, a hat tip to you. The mental accounting is interesting, the matched funds are equally green, equally valuable. With good earnings ahead, I'd simply avoid the withdrawal, and only transfer to IRA as you suggest. –  JoeTaxpayer Dec 24 '12 at 16:15
    
Thank you for that explanation. So you're saying: roll over x to my Roth IRA, and then withdraw Y for my personal expense. @Joe I need the extra personal cash, otherwise I'd roll over all of my 401k. Thanks! –  Kevin Meredith Dec 24 '12 at 22:02
    
@Kevin Your company match will have to be rolled over into a Traditional IRA, not a Roth IRA, though you could, of course, promptly roll over the Traditional IRA into a Roth IRA (paying taxes on the amount rolled over). But you need the cash.... so first decide how much you must have to withdraw, then decide how to divvy up the amount between Roth 401k and company match Traditional 401k, or Roth IRA and Traditional IRA after being let go and doing the roll overs. –  Dilip Sarwate Dec 24 '12 at 22:29
    
@DilipSarwate - thanks for that explanation. Does it matter whether I do the withdrawal from my Roth IRA or from my 401k? –  Kevin Meredith Dec 24 '12 at 23:25
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You can borrow against a 401k for 5 years. This defers any penalty fees that the IRS mandates. Put the cash back in your 401k within those 5 years.

you can also solo administer 401k plans even if you have an unincorporated business, so you can start one of those if you have any other form of cashflow, and there may be a way to get the other plan rolled into your solo one.

http://www.irs.gov/publications/p560/ch04.html#en_US_publink10009053

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When they are laid off the loan become due immediately or it will be counted as income. –  mhoran_psprep Dec 24 '12 at 12:49
    
@mhoran_psprep what about if he gets another job (with or without 401k) before he gets laid off. Or what if he claims he is self employed, even unincorporated sole proprietorship is eligible to self administer a 401k solo –  CQM Dec 24 '12 at 16:46
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@CQM Your response to mhoran_psprep makes your bad answer worse. –  Dilip Sarwate Dec 24 '12 at 18:14
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Imagine 100K in companyA 401K, you borrow 50K (the maximum amount), a few months later you are let go. ComapnyA wants the balanced owed (lets say 48K) paid within 30 days. Otherwise they will claim you have a balance of 52K in your account, with a recent withdraw of 48K. The 48K will be taxed and penalized. The actual amounts of the tax and penalty will depend on rates and the state involved. –  mhoran_psprep Dec 24 '12 at 19:12
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-1 More obfuscation of the main point that the 401k loan must be repaid to the original 401k plan upon termination of employment, and any rollovers into the 401k plan of a new employer, or a (possibly) bogus solo-401k and re-issuance of a loan from the new 401k is some months later. –  Dilip Sarwate Dec 24 '12 at 19:46
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