After exhausting all of your other sources of funds, you may turn to removing money from your IRA after losing your job. Removing the money from your IRA is the easy part; properly reporting the distribution on your income taxes can be more difficult. The Internal Revenue Service does not waive the early withdrawal penalty merely for being unemployed. However, while unemployed you may incur expenses that do qualify for an exemption from the early withdrawal penalty, such as health insurance while unemployed or medical expenses in excess of 7.5 percent of your adjusted gross income.
Request a distribution from the financial institution holding your IRA. The government does not prohibit you from taking money out, nor does it require that you submit any proof of a hardship. However, you may have to pay an early withdrawal penalty. At the end of the year, your financial institution will send you a Form 1099-R that records your distribution for tax purposes.
Complete Form 8606 to figure out your taxable portion of your IRA distribution. If you took the money from a traditional IRA to which you never made nondeductible contributions, skip this step because the entire amount is taxable. For Roth IRAs, only the amount of earnings or interest that you withdraw is taxable. You may withdraw contributions tax-free and penalty-free before withdrawing accrued interest and earnings.
Complete Form 5329 if any amount of your distribution is taxable. The early withdrawal penalty does not apply to non-taxable distributions, so if you only remove contributions from your Roth IRA, you need not complete Form 5329. If you have expenses that allow you to avoid the early withdrawal penalty, report it with Form 5329 and you will not owe the penalty. Otherwise, the form calculates the amount you owe in penalties.
Report the IRA distribution on Form 1040. The taxable portion goes on line 15b and the nontaxable portion goes on line 15a. Only the taxable portion is counted in your taxable income. You must report the nontaxable portion for record keeping.
Items you will need
- IRS Form 8606
- IRS Form 5329
- IRS Form 1040
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