When you're unemployed, especially for a long period of time, you might have to tap your Individual Retirement Account (IRA) to pay bills. Unfortunately, this means you'll incur an early-withdrawal penalty, and unemployment, no matter how long, won't get you out of that penalty. However, if you use the distribution to pay for medical premiums, you may avoid the penalty.
If you're taking the early withdrawal from a Roth IRA, you get your contributions out first and don't have to pay taxes and penalties on the withdrawal. This treatment is the same if you're unemployed. Say you've got $25,000 of Roth IRA contributions and $10,000 of earnings. You can take out the $25,000 tax-free and penalty-free. However, any additional withdrawals of earnings are taxed and potentially subject to the 10-percent early-withdrawal penalty just like distributions from traditional IRAs.
The only expense that could get you out of the early withdrawal penalty while unemployed is medical-insurance premiums. You can include the cost of premiums for yourself, your spouse and anyone you claim as a dependent. For example, if you have two kids, distributions taken to pay the premiums on their medical insurance are also exempt from the penalty.
To qualify for the penalty exemption, you have to receive unemployment benefits for at least 12 consecutive weeks. The benefits can be either under a state or federal unemployment program. If you don't receive unemployment benefits for whatever reason, you don't qualify for the exception.
To qualify for the penalty exception, you have to take the distributions either in the year that you received the unemployment benefits or the year after. In addition, you can't take the distribution more than 60 days after getting a new job. For example, if you're laid off in January 2013 and receive unemployment benefits that year, you would usually be able to use the penalty exception for distributions taken in 2013 or 2014. However, if you find a new job on Jan. 1, 2014, you couldn't use the penalty exception for distributions taken after Mar. 2, 2014.
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