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There is a tax on unemployed citizen in this country that can reach up to 50% and no one is talking about it.  It is costly and affects only the people that have exhausted all other sources of income.  Unemployment runs out, savings accounts are completely depleted, credit card debt is increased significantly trying to pay bills and then you go to your last resort—your retirement account.

This has happened to me.  Unfortunately, my husband who once had a very prosperous business as an architect lost his business due to the recession.  He was lucky enough to find a job at a company—but that lasted less than a year when that company downsized.  He has not been able to find steady work since then.  I worked as a teacher but recently switched jobs to make more money (that is another story I can tell another day).  Although the pay increase was nice, it still was not quite enough to pay the bills.  After 5 years of unemployment and underemployment, we used every resource we had.  When the mortgage was due and we did not have the money to pay it, we began using our retirement funds.  This is something that no one ever wants to do.  The fact is we had no other choice.  
The sad reality is, using your retirement account to live now is very costly—more costly than living off credit cards.  The tax bill for withdrawing $3500 ended up being $1700!!  This is because you are penalized for taking the money out before retirement age and then taxed on it as income.  
No one is talking about this tax but it is a real problem.  I have another friend that owes $5000 for withdrawal penalties from his retirement account—again he was long term unemployed.  It is so unfair for wealthy people like Mitt Romney to pay (maybe) nothing, yet someone desperately trying to survive is taxed at 50%.
Someone from Congress needs to introduce a bill that would eliminate withdrawal penalties for the long term unemployed.  To have to empty your retirement account while in your forties is tragic—we should not be further penalized by being taxed on it.  If they must tax the money as income, I can understand it (but don’t like it).  However, the penalties should be removed for anyone that has been unemployed or underemployed and has exhausted their unemployment benefits.  Why is it that this society has no problem taxing less fortunate people but will never vote to raise taxes on the most fortunate?  It does not make sense. If the wealthiest people cannot have an increase in taxes because they are the job creators, would you please tell me where those jobs are?
I would like to know if Mitt Romney would like to pay the $1700 in back taxes that I owe as I have no idea how I am going to do it.  Since he did not pay taxes or paid significantly less percentage than I did, maybe he would be willing to do that out of the kindness of his heart.  Or maybe he has more important things to be concerned about—like dressage.

Originally posted to palmbeachlefty on Mon Aug 06, 2012 at 05:27 PM PDT.

Also republished by Unemployment Chronicles.

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Comment Preferences

  •  And (12+ / 0-)

    to speak nothing of the money lost to Social Security Earnings.  I have figured that the 15 months I was unemployed and the fact the job I have now pays $15K less then I was making before getting laid off, I have lost close to $125K or more in SSI earnings. I am turning 50 this year.. and had to borrow money from my parents and suffer the humiliation of my mother being the 'buyer' of my car as I am the co-buyer because my credit rating has crashed as well. Had to buy a car, mine died after 10 years - an early death at 135K miles for being a Honda.

    Being unemployed is expensive and the wealthy asshats like Rmoney make me very very angry when you realize that they don't pay taxes on their 'earnings' while we pay income tax on our unemployment benefits to the tune of 25%.   That graduate degree I will be paying for until I am 80 was worth it though, I might be making half the money and living with relatives.

    Why do Republicans Hate Americans?

    by Caniac41 on Mon Aug 06, 2012 at 05:38:13 PM PDT

  •  If Unemployment Benes Are Being Paid on Debit (6+ / 0-)
    Recommended by:
    eXtina, phonegery, codairem, howd, kurt, LostBuckeye

    cards as I think food stamp money is, you're also paying the banksters a hefty tax. It's not only government that can levy taxes.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Mon Aug 06, 2012 at 05:53:21 PM PDT

  •  I cannot think of worse public policy... (4+ / 0-)
    Recommended by:
    phonegery, FG, Argyrios, kurt

    ...than the government making it easier for people to deplete their last source of capital left, and one they will desperately need when they are 60+.

    I am very sympathetic to your situation, but compare your potential earning power today to that when you are old. No matter how low it is now, it's going to be exponentially lower later.

    (-5.50,-6.67): Left Libertarian
    Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

    by Sparhawk on Mon Aug 06, 2012 at 06:05:06 PM PDT

    •  I don't think we should be punishing people who (6+ / 0-)

      are in the sad position of having to choose between digging into their retirement or becoming homeless.

    •  this is a huge problem (2+ / 0-)
      Recommended by:
      ChocolateChris, kurt

      but no one drawing from retirement accounts to avoid homelessness can afford to imagine future potential income calculations. If your credit becomes shot and you end up on the street or living month to month, you've moved into a different world than the one that financial planners wax eloquent about. There's an immediacy that defies classical planning. If one is homeless and destitute, one is also probably not imaging their relaxed retirement on a Miami beach.

      I think that 401Ks, like health insurance, are designed to bind you to an unchanging job and deprive you of the ability to be flexible or demand better treatment at that job. The tax penalties are part of that disincentive (with the idea that the tax deference or employer match aspects basically allow them to buy your inflexibility.) It's a part of the tax code written to favor employers over employees.

      •  How are they buying inflexibility? (0+ / 0-)

        You can always save non-401k money and use it whenever you want. You are also free not to use a 401k at all.

        How can a purely optional perk be bad?

        Also, if you feel this way about 401ks, you must really hate pensions!

        (-5.50,-6.67): Left Libertarian
        Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

        by Sparhawk on Tue Aug 07, 2012 at 06:44:31 AM PDT

        [ Parent ]

        •  I'm a postdoc. (0+ / 0-)

          No 401K, no Roth IRA, and certainly no pensions offered or allowed. No SSDI contributions either (which is twice as awesome because I have MS.) My income isn't "income" in the eyes of the gov't. Not only do I not have the normal options presented to me, I am forbidden to use the few that exist for the overlooked.

          They get creative when they want to screw you over.

          I don't hate pensions...I've had three elderly family members pass away in the last 2 years and pensions and modest SS were all they had in their final months. And even then, care was running 15K/mo out of pocket. The system is designed to devour. Absolutely consume. And the state was trying to raid existing pensions in the process.

          Privatizing such accounts or raiding them to pay down future debt...what a horrible mess. 401K's often restrict you to investing in the stock market, and with a limited range of offerings.

          401Ks are not the answer. Pensions are better but they're getting raided with increasing frequency. Many of us have no choices either way. Something is fundamentally broken here.

  •  Same thing happened to me (10+ / 0-)

    unemployed for ca. 8 years, had to live off retirement funds.  Now, into my third year of full time employment, still paying off the tax bills from that period.

    The trials and struggles of unemployment don't end with employment, unfortunately.

    It helps, of course, the being employed part, but it is a long climb out of that hole.

    Good luck to you.

    Words can sometimes, in moments of grace, attain the quality of deeds. --Elie Wiesel

    by a gilas girl on Mon Aug 06, 2012 at 06:09:46 PM PDT

  •  its a penalty, not a tax. (4+ / 1-)
    Recommended by:
    soros, FG, VClib, nextstep
    Hidden by:
  •  Things you may not know until it happens to you. (1+ / 0-)
    Recommended by:
    With rare exceptions, all 401K withdrawals are taxable as ordinary income. An additional 10% early distribution penalty tax will be assessed if you have not reached at least age 59 ½ when you take your distribution. Several exceptions to this penalty include:
    How unemployment is taxed

    Unfortunately, unemployment benefits count as taxable income on your federal return, but they're not necessarily taxed by your state. (See below for more information.)

    per TurboTax.

    Democrats - We represent America!

    by phonegery on Mon Aug 06, 2012 at 06:55:56 PM PDT

  •  This is a very important issue (2+ / 0-)
    Recommended by:
    Andrew F Cockburn, Miniaussiefan

    that would be good to put up as a petition at the White House petition site:

    Shop Liberally this holiday season at Kos Katalog

    by JamieG from Md on Mon Aug 06, 2012 at 07:28:52 PM PDT

  •  Withdraw Additional Tax from Retirement Account (0+ / 0-)

    Which then triggers another 10% penalty, which you then withdraw from the retirement account, triggering yet another 10% penalty, and so on...what does this infinite series converge to?  So the 10% penalty estimate is probably a bit low...the actual value is probably more like 11.5 or 12%.

  •  10% Penalty for Unemployed needs to be waived (0+ / 0-)

    And Romney needs to be subjected to the Buffett Rule and start paying 30% at least.  Of course when you went for 10 years paying zero 30% isn't going to be easy for him to swallow.

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