Lost Tax Shelters

• When you lose your job, you also lose the ability to contribute to a 401(k), 403(b) or other employer-sponsored retirement plan. Losing that tax shelter can have a big impact on your tax rate, boosting the amount you pay in taxes and making it that much harder to make ends meet. In addition, some employers have a waiting period for 401(k) participation, so when you do land a new job you may not be able to contribute right away. That can make your tax situation even worse since you will be taxed on all your earnings until you can start sheltering some of that money with a 401(k) or 403(b).
  
  

401(k) Issues

• It is tempting to dip into your 401(k) when you lose your job, but doing so could have both immediate and long-lasting effects on your taxes and your retirement planning. If you take money out of a 401(k) before age 59 1/2, you can expect a 10 percent penalty, as well as a 20 percent withholding from the plan administrator. That can mean up to a 30 percent reduction in the value of your 401(k) and a big tax bill when you file. Raiding your 401(k) can also set your retirement planning back years, making it that much harder to recover when you do find a new job.
  
  

Taxable Unemployment

• The unemployment compensation you receive can ease the burden of being unemployed and keep you afloat financially until you get another job. But keep in mind that the unemployment compensation you receive could be taxable. Since no withholding is taken out of your unemployment checks, you could end up owing a lot of money to the Internal Revenue Service when you file your return.
  
  

Potentially Higher Taxes

• When you are unemployed, you may draw money out of annuities, retirement programs and other tax-advantaged accounts. When you do so, you could trigger higher taxes and reduce the value of that money. It is important to look at all source of potential income, and choose the ones that will have the least impact on your taxable income and tax liability.