Unemployment compensation benefits are state-administered with some federal funding, and federal regulations apply in all states. States have additional rules and requirements. Assets do not affect your right to collect unemployment benefits. You must complete a job search and report all earned income for each period of compensation. If you have an individual retirement account (IRA), you may decide to use some of the funds for expenses while you are unemployed. An IRA you have personally funded does not count as earned income.
In an attempt to avoid collecting unemployment from the most recent employer and a pension from that employer at the same time, the unemployment laws provide that pension plan withdrawals may be deductible as income from unemployment benefits. Some states consider only a pension plan from the most recent employer, but others apply the rule to all pension plans. Tennessee ignores a lump-sum pension payment if the owner rolls the entire sum into an IRA. The IRA is not earned income for unemployment benefits calculations, but could be considered a pension if funded by an employer. If you receive regular periodic payments from an IRA, you may be "retired," precluding collecting unemployment benefits.
IRA Withdrawals and Contributions
If you personally funded your IRA, you can withdraw the money without losing unemployment benefits. You will pay taxes on any taxable funds withdrawn. You may want to set aside the potential taxes from the IRA withdrawal so you do not get behind on taxes. You typically owe a 10 percent penalty for your IRA withdrawals made before age 59 1/2. You can withdraw IRA funds without penalty after 12 weeks of unemployment if the purpose of the withdrawal is to pay your health insurance premiums. If you make your withdrawal at the appropriate time and for this purpose, you may save 10 percent in penalties. You cannot contribute to your IRA from your unemployment funds. Unemployment benefits are not earned income and do not qualify for IRA contributions. You can contribute to your IRA from income from your employment before your departure from employment.
Unemployment and Your IRA
In some states, you can withdraw a lump sum from your IRA and lose only a week of unemployment benefits, even if your employer funded your IRA. Michigan explains some of the nuances in its interpretation of the law, indicating that if you roll your retirement benefit into an IRA, you can continue to collect unemployment benefits. Your state may consider an IRA a savings account, not a pension plan, for unemployment offset. Check with your unemployment office for a definitive answer from your state, as many states, such as Michigan, have made legal determinations based on state law and a specific set of facts. California addresses the IRA as not deductible against unemployment compensation benefits in Section 1255.3 of Total and Partial Unemployment TPU 460.55.
Some states offset unemployment benefits with Social Security retirement payments. Louisiana reduces unemployment by 50 cents for each $1 in Social Security retirement benefits received. If you want to collect unemployment benefits from your state, you may not want to draw any of your retirement benefits, including Social Security, as this can cause you to incur an offset of your unemployment benefits.
- "The Wall Street Journal"; Seniors Face Unemployment Issues; Anne Tergesen
- CA.gov; Pension or Retirement Pay; Section 1255.3
- Make Money Quick and Easy; Can I Collect Unemployment and Social Security Retirement?; March 2011
- Michigan.gov: LARA Unemployment Insurance Agency -- Retirement Benefits
- SmartMoney: An IRA Primer; September 2000
- Kiplinger: You Need Earned Income for an IRA; Kimberly Lankford; April 2008
- U.S. Department of Labor: Directive -- Unemployment Insurance Program Letter; June 1995