401(k) distribution if unemployed

[Guest lvs]

At a recent local employer's group meeting, I heard a reference made to an

employee who was able to take a tax-free

distribution of his 401(k) while he was

unemployed. Is this correct?

Perhaps it was not necessarily tax-free, but penalty-free? Where would

I find written information on this?

[Dan]

You are correct, unless the plan contained money that was contributed "after-tax," it was not tax free. The distribution could be penalty free if the participant is 55 years of age (or older) and separated from service. IRC Sec. 72 (t)(2)(A)(v).

[Guest P A Weick]

Maybe they were thinking of taking employer securities purchased with matching contributions in kind. While this is not tax free, it is partly tax deferred because the net unrealized appreciation on the securities is not taxed until the participant sells them and then is taxed as capital gains. Otherwise, I know of no tax free withdrawal rights.

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[M R Bernardin]

There is also an exemption from the 10% penalty tax for distributions made from an IRA (not from a qualified plan) to an unemployed individual to cover the cost of health insurance premiums while unemployed.