Q. I recently became unemployed, and I am considering receiving withdrawals from my 401(k) and IRA retirement accounts. My question is this: Which has the least amount of tax liability, taking a withdrawal directly or first transferring the funds to a traditional IRA, then taking withdrawals as needed?

A.

Whether you withdraw funds from an IRA or a 401(k), the income tax implications are usually the same; the distributions are taxable income.

Distributions (other than periodic distributions) from both types of retirement plans occurring before age 59½ are subject to an additional 10 percent penalty for early withdrawal.

The biggest distinction between the two types of accounts is when the early distribution occurs before age 59½ but after attaining age 55. If you become unemployed (gleefully termed “separation from service” under the tax rules) after age 55, you can withdraw unlimited amounts from your employer’s retirement plan and avoid the 10 percent penalty. This exception does not apply to IRA withdrawals.

Depending on your age, there would be a big difference in whether you maintain the employer plan or transfer to an IRA and later withdraw funds. You can choose to distribute part and roll over part and still avoid the 10 percent penalty on the nonrollover amount.

Depending on what you want to do post-unemployment, you may also get creative with your retirement funds.

For example, I know a lot of folks who try their hand at self-employment. Depending on the type of business, it may make sense to set up a retirement plan to receive a rollover.  Once you have a new plan in place, you can borrow up to $50,000 (or, if less, 50 percent of the funds) from the plan tax-free to help you establish the new business or just carry you over until it gets going.

Of course, there are other considerations in setting up a plan, such as required contributions for employees of the new business. You should consult a qualified accountant to determine your best course.