How to Save for Retirement When You’re Unemployed

When you’re unemployed, one of the last things on your mind is how you’re going to save for retirement

That said:

Saving for retirement when you’re unemployed is actually pretty important -- if you can make it work.

Thankfully, there are still ways you can add to your nest egg when you’re unemployed, even as a single person. If you’re married, you might have even more options.

Here’s what you need to know about saving for retirement as an unemployed person.

It’s Still Important to Save for Retirement

Just because you’re unemployed doesn’t mean you shouldn’t set aside money for retirement.

Depending on how long you’re unemployed, skipping retirement contributions can be a major mistake.

Your contribution limit doesn’t rollover

First, investing in retirement accounts normally gives you a tax break.

  • Traditional retirement accounts allow you to take a tax deduction now. 
  • Roth retirement accounts require you to pay taxes on contributions now but give you tax-free withdrawals in retirement.

Both types are considered tax-deferred accounts.

The truth is:

These tax benefits can save you a ton of money, especially over the long term. The thing is, there are yearly contribution limits for these accounts. 

If you typically set aside more money than these limits and invest in a taxable investment account, skipping contributing for a year means you’ll miss out on those contribution limits forever.

Most retirement accounts require you to contribute by the end of the year or tax day (usually April 15th) at the latest.

After the deadline passes, any contributions you could have made to reach the limit can no longer be made. The amount you didn’t contribute does not roll over to the next tax year.

Instead, the amount you didn’t contribute, along with the potential tax benefit, is gone forever.

You may qualify for the Retirement Savings Contributions Credit

If you’re unemployed for the majority of a year or you have a low income, you may qualify for the Retirement Savings Contributions tax credit.

A tax credit reduces your tax bill by one dollar for each dollar of tax credit. This is much better than a tax deduction.

This credit allows you to get a credit for 50%, 20% or 10% of the amount you contribute to certain retirement plans. 

The maximum credit is $2,000 for those filing married filing jointly. It is $1,000 for other filing statuses.

You must be 18, not a full-time student and not claimed as a dependent on someone else’s return to qualify. 

Also, your adjusted gross income (AGI), must be below a certain threshold to qualify. Here are the current thresholds for the 2019 tax year:

Tax Saver's Credit (2019)

Credit Rate Married Filing Jointly Head of Household Single, Married Filing Separately, or Qualifying Widower
0% of your contribution more than $64,000 more than $48,000 more than $32,000
10% of your contribution $41,501 - $64,000 $31,126 - $48,000 $20,751 - $32,000
20% of your contribution $38,501 - $41,500 $28,876 - $31,125 $19,251 - $20,750
50% of your contribution AGI not more than $38,500 AGI not more than $28,875 AGI not more than $19,250

If you qualify, missing out on this credit isn’t something you’d want to discover after the fact.

How and Where You Can Set Money Aside

Before you start setting aside money into retirement accounts, you must know this.

In order to contribute to a retirement account, you have to have earned income in excess of the contribution.

Ways you may have earned income even if you’re unemployed

When you work at a job and receive a W-2, that money is earned income. If you run a business and pay self-employment tax on the income, that’s earned income, too. 

However:

Interest income and dividend income is not earned income. Neither is money sitting in your savings account.

If you haven’t been employed or made any money for a full calendar year, you have no earned income. That means you can’t contribute to retirement accounts that year.

Thankfully, there are plenty of ways you can have earned income.

If you worked for part of the year, the income you earned counts for the whole year. So, if you had a $120,000 salary and were let go on June 30th, you’d have roughly $60,000 of earned income.

You can also earn earned income from side hustles. You have to make sure you report the income and pay self-employment tax on it.

Wages earned from part-time jobs count, too, as long as you’re a W-2 employee.

Retirement accounts you may be able to contribute to

If you have earned income, you may be able to contribute to a retirement plan.

Here are a few options you may have access to.

IRAs

As long as you have earned income and meet the income requirements, you can contribute to a traditional or Roth IRA.

The contribution limit is $6,000 for 2019. If you’re age 50 or over, you can contribute an additional $1,000 catch up contribution.

Spousal retirement options

If you have a working spouse, you may be able to take advantage of their employer sponsored retirement plans. This can include 401(k) plans.

While the contributions won’t be in your name, you can increase your spouse’s workplace retirement contribution. This can make sure you’re still on track for retirement as a couple. 

If having equal retirement balances is important in your marriage, you can fix this once you’re employed again. 

At that time, you can shift contributions to your individual retirement accounts until you’re caught up. Then, you can balance between both spouse’s workplace retirement accounts again.

Self-employed retirement accounts

If you have self-employment income, you may be able to start a number of different types of retirement accounts.

These may include:

  • Solo 401(k)s, also called individual 401(k)s
  • Simplified Employee Pension (SEP) IRAs
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs
  • Profit sharing plans
  • Money purchase plans
  • Defined benefit plans

Creating one of these types of accounts to contribute to while you’re unemployed may not make sense.

That said, if you were already looking for a self-employed retirement plan to start, they may be a good idea.

Don’t have cash to invest?

If you don’t have cash to invest, you may still be able to contribute to a retirement account. 

If you have investments in a taxable investment account, you could sell them. Then, take that money and invest it in a retirement account. 

Of course:

There may be tax impacts on the sale of your investments. Consult a tax professional for details on what taxes you may have to pay.

Don’t have earned income?

If you can’t contribute to a retirement account because you don’t have earned income, that doesn’t mean you can’t invest for retirement.

A taxable investment account can help. 

Now:

You won’t get a tax break now or later by investing in a taxable investment account. That said, you can still invest your money. Doing this can help you from getting behind on your retirement savings.

Once you have earned income again, you could sell the investments. After you account for any taxes, you can then reinvest the money in a retirement account.

You may be able to contribute to a traditional or Roth IRA even if you don’t have earned income and you’re married. 

The spousal IRA rules allow you to contribute to an IRA in your name. Your spouse must have enough earned income to cover all of their retirement contributions and your spousal IRA contributions. You must file as married filing jointly to qualify for a spousal IRA.

Saving for Retirement Shouldn’t Jeopardize Your Immediate Financial Health

When you’re unemployed, your first priority should be figuring out how to pay the bills without destroying your finances. 

An emergency fund is key

Hopefully, you have a fully stocked emergency fund.

Usually, a fully stocked emergency fund is three to six months worth of expenses set aside in savings accounts.

This money can help you survive financially until you find another job.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

If you’re lucky enough to have money above and beyond your emergency fund, then you should definitely consider continuing to invest for retirement.

Don’t have a full emergency fund?

If you don’t have a full emergency fund, saving for retirement probably shouldn’t be a priority until you’re employed again.

Instead, you need to focus on staying on top of your bills to avoid late payments and damage to your credit.

You may want to hold off on investing if your employment prospects are grim.

If you aren’t sure if you’ll be able to find a new job in a short period of time, you may need access to money above and beyond your emergency fund to stay above water until you’re employed again.

You should avoid withdrawing money from your retirement funds if at all possible.

Why?

You may have to pay taxes and penalties if you do. If you’re age 59 and ½ or older, the penalties may not apply depending on the type of account.

Don’t take out debt to save for retirement

You don’t want to invest for your retirement if it means taking out debt to cover your monthly expenses.

The interest rates on credit card debt are usually higher than the long-term return on most investments. 

Instead, pay your expenses with cash and hold off on your retirement contributions until they fit in your monthly budget again.

Focus on Finding a New Job

When you’re unemployed, it can be easy to focus on things other than your job search to distract you.

You should definitely pay attention to your finances and save for retirement when you’re unemployed, if possible.

Your main concern:

Finding a new job.

Once you find a job, you can kick up your retirement contributions back to their normal levels or higher. That way, your retirement funds can catch up. 

As always, consider consulting with a certified financial planner before making any major decisions that could impact your finances.


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