Do I have to report 401k withdrawal to unemployment?

If you are unemployed, you may be eligible to claim unemployment benefits from your state. Unemployment insurance is a state and federal-run program that provides monetary payments to workers who become unemployed due to reasons beyond their control. If your unemployment checks are insufficient, you can decide to supplement this income with a 401(k) withdrawal. However, the common question that people ask is: Do I need to report 401(k) withdrawals to unemployment

Since unemployment insurance is a state-run program that provides unemployment benefits to unemployed individuals in the state, whether you have to report 401k withdrawal varies by states. Most states require you to report 401(k) withdrawals to unemployment, since 401(k) benefits are considered an income, and may affect the unemployment payments. If your state counts 401(k) withdrawals as an income, you should expect a dollar-for-dollar reduction of your weekly unemployment benefit. 

Unemployment Eligibility Rules

There are different eligibility rules for claiming unemployment benefits. Usually, you must meet the eligibility requirement for time worked during a given period or for wages earned. For example, North Carolina requires unemployed residents to have worked for a minimum of 18 months or more before making an unemployment claim. You must also be available to work at any time to maintain eligibility for the state benefits.

There are certain cases that may disqualify you from receiving unemployment compensation. Some of the common reasons for disqualification include labor disputes, misconduct, you resigned due to illness, or you resigned without a good cause. If the state finds that you were at fault when leaving your job, this is enough reason to disqualify you from receiving the benefits.

Figuring Out Your Weekly Benefit

Each state has a different formula for calculating unemployment benefits. If you meet the state unemployment benefits requirements, you can apply for unemployment benefits from your state. The unemployment benefits you receive depend on your weekly wages before you were laid off. States pay the benefit as a fraction of your salary during the base period, where the base period is the first four of the last five calendar quarters before you made a claim. In many states, you could receive half of your weekly earnings up to a certain limit. For example, if you earned a weekly pay of $500, you could receive $250 as your weekly unemployment benefit.

If you have a 401(k) and you leave your job, you can make a withdrawal even if you are not yet 59 ½. You can withdraw funds from a 401(k) account to pay for medical expenses, pay for college, or even meet your daily needs if the unemployment checks have been delayed. Once you request a withdrawal, you could receive the funds in 3 to 10 days. However, the check amount may be lower than the amount of distribution you requested. For example, if you take out $10,000 from your 401(k), you may only receive $8,000. The plan administrator withholds 20% of the withdrawn amount for taxes, and you will still be required to pay an additional 10% penalty i.e. $1,000 if you are below 59 ½. Depending on your state, you may be required to report the 401(k) withdrawal when claiming unemployment benefits. 

Can 401(k) Withdrawal Affect Unemployment Benefits in Michigan?

If you earned any income during the unemployment period, you must report the income when you claim benefits in Michigan. The state considers 401(k) withdrawals and pension payments to be incomes even if you did not work during the period. Other types of income you should report include holiday pay, severance pay, and vacation pay. You must report these incomes in the period you earned them, even if you are yet to receive the payment. Failure to report the 401(k) withdrawal and other incomes when claiming the benefits will be considered to be a fraud, and you could be liable to pay penalties and fines.

Can 401(k) Withdrawal Affect Unemployment Benefits in Pennsylvania?

The Pennsylvania Unemployment Compensation Law requires individuals to report all incomes earned during the period when making a claim. Claimants must report 401(k) distributions, retirement income, and pension payments. These incomes are deductible from the unemployment benefits, and they can reduce an individual's weekly benefits dollar-for-dollar. However, lump-sum 401(k) distributions are non-deductible unless an individual has the option of taking monthly distributions.

Can 401(k) Withdrawal Affect Unemployment Benefits in California?

Under California law, 401(k) distributions and pension payments must be reported when claiming unemployment benefits. These payments are counted as income and may reduce an individual's weekly benefits. For example, if you are entitled to receive $450 in weekly unemployment insurance benefits, and you receive $200 in 401(k) withdrawals, you will only receive $250 in benefits. However, under California Law, your 401(k) withdrawals will not affect your unemployment benefits if you contributed to the 401(k) during the base period.

Can 401(k) Withdrawal Affect Unemployment Benefits in Texas?

You must report any retirement income to the Texas Workforce Commission (TWC) when you claim unemployment benefits. The commission will assess if the 401(k) benefits affect the unemployment benefits, and mail you a decision. Retirement payments such as a 401(k) distribution may be deductible if the income is based on wages paid by a base-period employer. Also, monthly 401(k) withdrawals may affect your unemployment benefits. However, if you withdraw the benefits in one lump sum, the distribution will not be deductible from your unemployment benefits.

How to Avoid Retirement Income Deduction from Unemployment Benefits

Most states require individuals claiming unemployment benefits to report 401(k) withdrawals and other types of incomes. 401(k) withdrawals are considered a form of income, and they will affect the benefits you receive from unemployment. Usually, the portion of 401(k) distributions attributable to the employer is deductible from the unemployment benefits you receive.

However, IRA withdrawals do not affect your unemployment benefits, and hence do not need to be reported to the state unemployment office. You can rollover the 401(k) to an IRA to keep your unemployment benefits intact. You can then withdraw funds from the IRA without worrying that you will receive reduced unemployment checks compared to what you are qualified to get.