n Access your 401(k)? No way. Accessing your retirement plan can seem like an easy way to make ends meet while looking for a new job, but it can end up hurting you in the long run. Because 401(k) plans accumulate on a tax-deferred basis, withdrawing money before age 59½ will cause you to incur income tax and a potential penalty of up to 10%. Worst of all, you will prematurely consume retirement dollars that you have been accumulating for years.
n Preserve future assets. View your job loss as a temporary situation, and maintain assets earmarked for your long-term goals, unless it is absolutely necessary that you access them. n Keep insurance active. It may be tempting to allow insurance coverage to lapse when prioritizing expenses, but it is not recommended. The financial protection provided by life, disability, health, or other insurance is important to maintain, especially during difficult times.
Understand tax consequences Any time you encounter a major life change, whether it be marriage, buying a house, or losing a job, it is important to understand any tax implications, and create a suitable strategy to help keep your finances intact. It’s a good idea to always consult your tax professional for guidance before implementing any tax strategy.
Consider the following common scenarios and their tax implications. Scenario Taxable
Tax Deductible
Not Taxable/Other
Your final paycheck included severance pay and accumulated leave, sick, and vacation pay. You are approved for and begin collecting unemployment benefits.
Appropriate withholding can help mitigate the tax liability.
You can request that federal income taxes be withheld from unemployment checks. You will be required to pay taxes on the distribution. If you are under age 59½, you may also be subject to a 10% early withdrawal penalty.
You access your retirement plan to manage short-term cash flow requirements.
You incur costs associated with your job search.
Costs associated with your job search, such as a resume preparation, employment agency fees, and travel to and from interviews are tax deductible.
You find a new job, but must relocate.
Your moving expenses may be tax deductible.
While unemployed, you receive monetary gifts from friends and family to help manage expenses.
This is not considered taxable income to you, but the giver may be taxed if the gift exceeded the annual gift exclusion amount.
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