Have Extra Unemployment Money In Those Coffers? Yes, You Can Still Invest

• Author: Kelly Cooke
• Posted: 2024-08-03

For many people across the country, unemployment money was a saving grace. However, the extent to which it saved many was determined by local cost of living. For example, for someone living in a standard, middle-class community in Tennessee, one week's worth of solely the $600 bump of unemployment is likely enough to pay a month of rent. On the other hand, for someone renting an apartment in Upper Manhattan, that $600 might cover a few days at most of rent.

If you don't have extra money sitting around, you're not alone. The majority of Americans have indeed already had to spend their unemployment money on necessities, like rent and food. However, if you're one of the fortunate people who already lived in a cheaper area and managed to save up that money, you can invest it, with some caveats.

Investing Using an IRA

Of course, money that you put into an IRA cannot be "unearned". This means that it technically cannot come from unemployment money. However, keep in mind that if you earned the amount you're contributing, regardless of what time you did earn it during the calendar year, you can still contribute this out of the money you received while unemployed.

One thing to keep in mind is that the collective IRA contribution limit for 2020 is $6,000 unless you're an older individual who qualifies for "catch-up" contributions, which typically adds another $1,000 to this maximum. You have two choices: a standard IRA and a Roth IRA.

A standard IRA will allow you to invest your money "pre-tax", meaning you won't have to pay federal, state, or local income tax on it. This makes sense to do if you did not elect to have taxes withheld on unemployment money and don't wish to pay them at the end of this year. Especially if you would have normally contributed to a workplace retirement plan, a standard IRA contribution could make sense.

On the other hand, if your total income for the year won't be too much, placing you in a very low tax bracket federally and for your state, if applicable, a Roth IRA contribution could make more sense. These are "post-tax", meaning you pay all taxes now on them, but you will not pay taxes for qualified withdrawals later on.

Again, you can only contribute $6,000 (so long as you have earned this amount in the 2020 calendar year; if not, you may contribute up to the amount you earned) total, so you could put $3,000 into a Roth IRA and $3,000 into a standard IRA, for example. You may want to ask a trusted accountant for more assistance identifying what the most helpful tax strategy for you will be.

The ABLE Account

You have likely heard of ABLE accounts, but you may not understand how wide-ranging eligibility is for these. These were created under IRS Code Section 529, the same as college funds. These accounts are reserved for individuals with diagnosed, recognized disabilities that fundamentally impact life activities.

You may assume that because you can hold down a job, you're not eligible. However, many people are eligible. For example, those who suffer from migraine headaches are. People with high-functioning Autism are also eligible, as are those who suffer from countless other health issues, diseases, and anything codified as a "disability" for Social Security purposes.

Generally, you self-certify a disability, meaning that prove is rarely required to be furnished. Each state implements the program differently, so there may be some fees attached. Some states will give you a debit card, while others require you to utilize a bank account.

Either way, you can contribute up to $15,000 per calendar year, and potentially more if you have a job and have earned income. Unearned income can be placed in these accounts. They usually contain investments you elect when you place your contributions. It is with "post-tax" money, but you can withdraw money from these to pay for nearly anything that assists with your quality of life.

Note that if you don't have a legitimate disability, it's illegal to make an ABLE account. If you're ever audited and can't readily show via prescriptions, a doctor's letter, etc., that you're disabled, you could even be fined and imprisoned for tax fraud.

Regardless of whether you're stuck with only IRAs or you can get an ABLE account, you should be able to put those remaining funds to work for you!