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My husband lost his job in August because the place where he worked closed. He signed up for Unemployment Benefits a few days later. He already knew that the first week was a waiting period. The second week he started receiving his Benefits. He had a 401k and after he got laid off he had to withdraw the full amount of money. The Financial Adviser where he had his 401k said he should have a check mailed to him for the full amount so he did. He had to fax a copy of the check to the Unemployment Office. He didn't know that he wasn't supposed to spend any of the money so we bought a lot of things we needed and some things that we wanted. Now his Unemployment Benefits are on hold and he won't start receiving them again until a dollar-for-dollar deduction has been deducted from his weekly Benefit payment.
Without his weekly Benefits we're going to have a hard time making ends meet.
My question is why should they care what he spent the money on and why he wasn't supposed to spend it.
Maybe things are very different there but in every state I have been in there is no requirement to report 401k withdrawals to the unemployment office and certainly no reason explain what you used it for. It is your savings and does not change the unemployment situation or your claim to benefits.
If that "Financial Advisor" is one that works under any sort of licensing board, I'd file a formal complaint with that board that you weren't advised that the thing to do with that money was to roll it over into an IRA. It won't solve your problem, but maybe it'll help someone down the line.
Thank you for your replies. We live in Indiana and the laws are different here so it looks like my husband might not be receiving anymore Unemployment Benefits.
First time I ever heard it was mandatory to withdraw your 401K upon leaving a company. Most that I am aware gave you an option to leave it or rollover into another 401K or IRA. Not sure about the law or is it a company policy?
Bizarro!!! Any 'advisor' should know if you take possession of your 401k, it is taxable to you. When disbursing directly to you, by law, the 401k custodian/trustee MUST withhold 20% for federal taxes. In addition, if you are under 59-1/2, there is a 10% federal tax penalty for early withdrawal on top of the ordinary federal and state income taxes. Also, a lump-sum withdrawal may very well put you in a higher tax bracket, further compounding the tax problem. Usually, early withdrawal from retirement funds will cost you 40% of that amount in taxes and penalties - now - when you most need this money.
You can mitigate some of this by immediately setting up an IRA and depositing the money into that as a rollover within 60 days of the withdrawal. At least then the whole lump sum might not be subject to income taxes and penalties - only the amount you withdraw as you need it.
The assumption by the unemployment offices is this is a partially-funded employer retirement plan, as most employers match some portion of the employee 401k contributions. In many states, withdrawals from employer funded retirement plans affect unemployment compensation benefits dollar for dollar. I don't think there is anything you can do at this point - unless you tell the UE people you have rolled this money over into another retirement account. They might modify their stance on the benefit payments if you can provide proof of the rollover.
You have one year to collect your state unemployment benefits once you've filed a claim. If your 401k withdrawal is not equal to 52 weeks of benefits, you still might collect something. If Congress extends the unemployment legislation, under a normal claim, you could possibly collect unemployment benefits for up to 99 weeks ($38,000 = 99 wks x $390/wk for Indiana). As it stands now, even if the unemployment legislation is extended, you might not exhaust your state benefits within one year and, therefore, not be eligible for Emergency Unemployment Compensation Benefits nor Extended Benefits. You must begin EUC benefits before the expiration of your first benefit year in order to be eligible.
You mention the state won't pay you until these monies are used up. Do you have an actual claim in place with a beginning and end date? If not, you can open your claim when you have 'used' the equivalent weeks of benefits, thus preserving all your state and federal benefits provided you have sufficient earnings history going back 18 months. Ask Indiana if you can withdraw your claim or if they can void your claim so that you can refile later to preserve your benefits.
Had that 401k custodian cut a check payable to your rollover IRA trustee and sent it directly to them (or to you) for deposit into your rollover IRA, there would be no withholding, no penalty, the funds would be removed from the scrutiny of the unemployment offices, and you would still be able to collect benefits. If you didn't have an IRA anywhere, you could have immediately set up a small account at a local bank or credit union, deposited the check there, and then withdrawn from that account from time to time as needed - with no withholding. Penalty would still apply if you are under 59-1/2.
This was an EXTREMELY EXPENSIVE and outrageous piece of wrong advice on a several levels which may needlessly cost you many, many thousands of dollars, if not tens of thousands, and unnecessary financial hardship.
Please try to set up a rollover account and communicate with the UE people. It is a crying shame to lose these unemployment benefits and have the potential tax problems, as well.
I hope your husband finds employment soon.
Last edited by Ariadne22; 10-26-2011 at 10:12 PM..
First time I ever heard it was mandatory to withdraw your 401K upon leaving a company. Most that I am aware gave you an option to leave it or rollover into another 401K or IRA. Not sure about the law or is it a company policy?
IIRC you are not required (by law)to withdraw (close) 401k if acct balance is over $5000. If under 5k, then you may be required(by plan) to withdraw. The withdrawal then has choice of Rollover IRA, new employer 401K (if OK with new employer), or take cash subject to taxes, penalties, etc, with 60 days to decide.
This happened to me twice (under 5K, rolled into Rollover IRA). Which was OK with me as I already had Rollover IRA (well over 5K) from other employers. Personally I have never quite understood why you would leave money in old plan vs. rollover to IRA you then have more control over.
No matter what the amount, if your husband is under 59 1/2, he will be paying taxes and penalties on this. I hope he will not.
Personally, I think the financial guy needs a new profession. Oddstray is right: you should report him; if not to a board, to the state Attorney General. What he did is costing you money in loss of unemployment and also will in taxes and perhaps penalties -- in the event his advice was wrong, you will have it ON RECORD that he did this, should he ever get brought up on charges for advising many to "cash in".
My husband lost his job in August because the place where he worked closed. He signed up for Unemployment Benefits a few days later. He already knew that the first week was a waiting period. The second week he started receiving his Benefits. He had a 401k and after he got laid off he had to withdraw the full amount of money. The Financial Adviser where he had his 401k said he should have a check mailed to him for the full amount so he did. He had to fax a copy of the check to the Unemployment Office. He didn't know that he wasn't supposed to spend any of the money so we bought a lot of things we needed and some things that we wanted. Now his Unemployment Benefits are on hold and he won't start receiving them again until a dollar-for-dollar deduction has been deducted from his weekly Benefit payment.
Without his weekly Benefits we're going to have a hard time making ends meet.
My question is why should they care what he spent the money on and why he wasn't supposed to spend it.
Any reply would be appreciated.
Thank you.
This won't help you but it may help a reader. I am guessing that the financial adviser was some one at the company and not a professional from the advice your were given. However, if the company was closing they were probably closing the 401k and thus you either had to take your money or move it to another retirement account. (You could not leave it as the company was closing the plan.) Moving it would have avoided your problems but then you could not have spent the money. You should not have spent the money since you just lost a job.
Using Federal law the money you took out of the 401k was not taxed for income taxes when you earned it. Thus when you take it out - at any age - it is considered taxable income. My guess is the state follows the Federal law and thus you have additional income for the year. However I do not see why you would not receive unemployment benefits. Lets say the whole 401k was income in the week you received it. The next week you received nothing from the 401k so you should get benefits. I would appeal the decision with the unemployment office.
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