Taxes on the unemployed

Recently the IRS prepared a free booklet explaining the basic taxation on unemployment and severance pay, as well as various deductions job seekers can take. If you know someone who is or was unemployed, I’d recommend checking out the booklet at this link:

http://www.irs.gov/pub/irs-pdf/p4128.pdf

However, the IRS didn’t discuss the tax consequences of withdrawing funds from Traditional IRA accounts. Generally, if you withdraw funds from an IRA before reaching age 59 1/2, you must pay tax on the withdrawal, as well as a 10% penalty for early withdrawal. If you are over 59 1/2, you will have to pay some tax on the withdrawal in most cases.

A ROTH IRA is different as those monies are invested post-tax (after you’ve paid tax on the earnings). Generally, withdrawals from ROTH IRAs are taxed only on the earnings generated. I would recommend you speak with your investment adviser to see what taxes may be owed.

If you receive unemployment or take money from a Traditional IRA, I’d recommend taking at least some withholding for federal taxes to avoid a tax bill come next April.

Any thoughts or questions, please feel free to contact me.

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