3 Financial Strategies for the Unemployed

by Mark P. Cussen, CFP, CMFC, AFC

Being unemployed is never fun and can be very hard on your finances. But these financial strategies can serve as a good consolation prize if you play your cards right and follow the rules.

If you’re one of the unfortunate group of people who don’t have a job, then you’re probably doing everything you can to stretch your savings as far as possible. But there are a couple of things that you can do during this period that you may not have thought of.

If you anticipate that your income this year will be much lower than it usually is, then there could be a silver lining that comes with your loss of income.

Roth Conversions

If you participated in your previous employer’s qualified retirement savings plan or contributed to a traditional IRA, this could be the ideal time to convert your account to a Roth IRA.

For example, say you previously earned $60,000 a year and then got laid off, and you saved up $40,000 in a 401(k) plan. You could roll that plan directly into a Roth IRA and have it taxed at a lower rate than you would pay if you did this while still employed. Then, you could grow that money tax-free until retirement or leave it to your heirs.

Related: Roth Conversions and Recharacterizations

Selling Appreciated Investments

If you own a sizeable block of stocks in a taxable account that has grown substantially over time since you purchased them, this is also an ideal time to sell them.

If you have held your stock for more than a year, it will be taxed at a lower rate than if you held it for exactly one year or less. In fact, the capital gains rate is zero for those in the lowest tax bracket.

Of course, the income you generate from the sale may propel you into a higher tax bracket, but you will still probably pay less in taxes on your sale than you would pay if you sold them while employed.

Tax Credits

If your income is much less this year than in years past, and you can usually claim some tax credits, those credits might go unused this year if you can’t generate taxable income from somewhere.

For example, if you were making $60,000 a year and were able to cancel the majority of your tax bill with tax credits such as education credits or the Child Tax Credit, then you may not be eligible to claim those credits if you have little or no income for the year.

This is why it can be a doubly good idea to convert your retirement accounts to Roths or sell appreciated investments because those tax credits can be used to cancel the tax on these transactions. You may be able to avoid taxation altogether on them from those credits alone, depending upon the size of your sale or conversion.

Conclusion

Being unemployed is never fun and can be very hard on your finances. But the above strategies can serve as a good consolation prize if you play your cards right and follow the rules. Consult your financial advisor for more information on capitalizing on your unemployment.

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Reviewed November 2023