Does unemployment qualify as a reason for a hardship withdrawal from my traditional IRA?

Clipboard with job applilcation

Q. I recently lost my job and rolled my 401(k) plan into a traditional IRA. But I'm still unemployed and need to withdraw some of that money to pay my rent and utility bills. Would this qualify for some sort of hardship withdrawal, and can I avoid paying a penalty or taxes on this money?

A. Probably not.

The IRS takes a fairly unforgiving stance on withdrawals from a traditional IRA for people under age 59 1/2.

They are almost always subject to a 10% penalty, plus regular income tax on the portion that reflects the return of tax-deductible contributions and investment earnings. In the case of your 401(k) rollover, that means taxes would probably apply to the entire amount of the withdrawal.

The penalty is only waived if:

IRS Publication 590 has more information on these exceptions to the 10% penalty. To report penalty-free withdrawals, you need to file IRS Form 5329.

But based on what you've told us, it doesn't appear that any of these exceptions apply to your situation.

Early withdrawals must always be reported as income on your federal taxes. There is no list of exceptions for that rule.

Bottom line: It looks like you'll have to pay both the penalty and income taxes on any money you withdraw.

But before you do that, ask a CPA or tax attorney to review your financial records and offer a professional opinion on how much you must pay and what you might be able to do to reduce your overall tax liability.