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  1. #1
    Join Date
    Jun 2015
    Posts
    28

    Default Will Deposits to or Withdrawals from a 401K Affect Unemployment Eligibility

    I just received notice that I can contribute up to 100% in my 401K. It is attractive to me now to do so because more can be contributed to a Roth 401K as opposed to a regular Roth IRA. A parent passed away recently and I can use some inherited money to live off of while I fully fund the Roth IRA with my job pay. But I need to know if they were to let me go, would this affect my unemployment benefit? I have enough inheritance to do this for 2 years. My pay check will only show after tax dollars going into a 401K as opposed to my bank. Since unemployment is based on an average pay over a period of time, will I be cutting off my nose to spite my face? In other words, would this action make me ineligible for unemployment or eligible for less unemployment? I think we need all the strategy possible to retire and not be broke in our economy. I work and live in Kentucky.

  2. #2
    Join Date
    Mar 2012
    Posts
    1,360

    Default Re: Would a Radical 401k Contribution Approach Make Me Inelligible for Unemployment

    As to the unemployment, your contributions won't effect that, but withdrawals might. Depends on state rules and if the employer contributes a match.

    You can't really contribute 100%. Some money will have to be kept out because of taxes and other employer deductions. There is also an IRS limit to 401K plans and I think for this year it's $18,000. Then depending on your income and age, you can still contribute to your IRA.

    Keep this in mind before you fully commit to Roth exclusively, and living with no pay check. I was able to use a mix of traditional IRA, roth IRA, 401K to manipulate my income so that I was at the tippy top of the income scale to qualify for the Tax Saver's Credit. While it allows up to $1,000 credit, in practice, the most it every got me was about $650 because it's a nonrefundable credit and can't exceed your tax liability. It allowed me to not pay any taxes for many years, and during my low income years after I lost my job, I was able then convert 401K, Trad IRA to roth so as to pay no taxes and not have my standard deduction go to waste.

  3. #3
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    24,521

    Default Re: Would a Radical 401k Contribution Approach Make Me Inelligible for Unemployment

    It's $18,000 if you are under 50. If you are over 50, it's $24,000.

  4. #4
    Join Date
    Sep 2010
    Posts
    19,901

    Default Re: Would a Radical 401k Contribution Approach Make Me Inelligible for Unemployment

    Neglecting the retirement contribution aspect, your UI eligibility is based on your gross pay not what you net after deductions.

  5. #5
    Join Date
    Jun 2015
    Posts
    28

    Default Re: Would a Radical 401k Contribution Approach Make Me Inelligible for Unemployment

    Yes, thank you. I saw it on the irs.gov site.

    - - - Updated - - -

    Thank you. You are giving me the confidence that uping the contribution is the thing to do.

    - - - Updated - - -

    Great point on holding out for insurance deductions and taxes for the Roth. I am not sure I follow the Tax Saver's Credit info, but it sure sounds good. I want to learn about that. Possibly google "Tax Saver's Credit" and will see what shows up.

  6. #6
    Join Date
    Mar 2013
    Posts
    18,340

    Default Re: Will Deposits to or Withdrawals from a 401K Affect Unemployment Eligibility

    Quote Quoting personal rep
    View Post
    would this action make me ineligible for unemployment or eligible for less unemployment?
    No.

    UI is based on wages.

    Distributions from retirement accounts might be taxed as income but they are not wages for UI.

  7. #7
    Join Date
    Mar 2012
    Posts
    1,360

    Default Re: Will Deposits to or Withdrawals from a 401K Affect Unemployment Eligibility

    Quote Quoting adjusterjack
    View Post
    Distributions from retirement accounts might be taxed as income but they are not wages for UI.
    True, but while you're collecting UI, many states treat them as pensions that requires offsets to your UI benefits. While not a tax, you can really come out on the shortend of the stick.

  8. #8
    Join Date
    Jun 2015
    Posts
    28

    Default Re: Will Deposits to or Withdrawals from a 401K Affect Unemployment Eligibility

    My goal is to use only needed money from a non-ira (inherited account) to live off of while boosting my Roth 401k contribution as high as they allow. I will not go over the allowed amount for the year because there are only 4 months remaining, and I do not make that much. In Kentucky I researched and they average so many weeks pay in calculating UI. Thank you for your insights. I do not want to take a chance on losing a job and having no cushion if UI were to not be honored due to this 401k contribution. I will NOT be taking distributions (under 55 year now), but wanted to be sure ok with this change.

  9. #9
    Join Date
    Jan 2015
    Posts
    1,142

    Default Re: Will Deposits to or Withdrawals from a 401K Affect Unemployment Eligibility

    Most certainly most states do not treat IRA's as retirement pensions when you do sign up for unemployment, particularly if you are not actively drawing them out. Only in the circumstance that the employee were laid off of out of work through no fault of their own, and then also receiving a pension would there be any decision related to unemployment and pensions of any kind.

    If you were let go, the calculation of unemployment benefits would be based upon your wages in the appropriate quarters and the reason you left your job. If you were to begin at that time taking distributions from your 401K's, or pulled out all your 401K's, decided to draw them out, that would be an issue you'd discuss with the KY unemployment system. The situation would depend in a large part on whether or not it was considered an employer contribution pension, and as I said, most generally it is not. Lots of people pull out all their retirement when they lose their job, and draw unemployment while they are doing it.

    Unemployment insurance is not and has never been based upon your income. Therefore taking out 401K money usually does not make you ineligible based on that you "have enough money to live on without unemployment" or anything like that. It doesn't matter if you are a trust fund baby, your wife wins the lottery, how much money you have in your IRA's or have in savings accounts or whatever. No questions are ever asked about your income, and you should never postpone filing for benefits until you are really desperate, have spent up all your other assets, etc.

    IRA's are usually a very very good idea. Unemployment insurance, if you were laid off or determined to be let go through no fault of your own from a job is not very much money, and it ends abruptly after about six months and until you have worked again for covered employers. It's a very small income replacement stop gap, and is absolutely not income based. In KY at present it tops out quickly at $415 a week for 26 weeks, no matter how much income you have been making. How to qualify for unemployment, if and when you might lose your job, is not ever anything that should affect your retirement planning over the long term. Are you thinking your job may end or your employer may close soon?

    They only use your actual gross wages from reports provided by your employer in the quarters they are using at that time to calculate your unemployment insurance benefit amount. That you have an IRA or a ROTH or whatever will not reflect in those quarters, and will have no effect on how much you are approved to draw.

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