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Texas ISD School Guide
Texas ISD School Guide

Employment Tips

A 401(k) as Unemployment Insurance?
By:Terry Mitchell

The rules for 401(k) plans need to be changed to allow people to take penalty-free distributions from their 401(k) account(s) during times of unemployment. Those distributions could come from accounts with any previous employer, not just the one from which a worker was most recently terminated. The funds could be used for any purpose and would not be restricted to use for paying the rent, making a house payment, or other hardship situations. Unemployment is enough of a hardship in and of itself and those weekly checks from the state employment commission hardly begin to make up for lost income.

The only thing the unemployed would need to document would be the fact they were involuntarily terminated from their job. The standard termination letter could fulfill that requirement. Voluntary departure from one's job (including the acceptance of a buyout) or termination due to illegal activity such as assaulting a co-worker or downloading child pornography on the office computer would not be justification for penalty-free withdrawals.

Of course, one could argue that this would be subject to abuse. For example, some people would try to continue making penalty-free withdrawals even after they have found a new job (although the IRS could easily catch that kind of thing). However, that's not reason enough to dismiss the concept offhand. If potential abuse were the only deciding factor as to whether a concept should the adopted, then FEMA would never have gotten off drawing board.

Besides, allowing a 401(k) to be used during times of unemployment would encourage greater participation by people who either don't participate in their employers' 401(k) plans or limit their participation for fear that they will need their money during times of crisis. They are also wary of all the red tape involved in taking some of the qualified early, penalty-free distributions under the current rules.

Terry Mitchell

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