If you're a Massachusetts resident who receives unemployment, you are required to report all wages you earned during unemployment to the Massachusetts Department of Labor. Although taking a 401(k) withdrawal may feel like a good way to supplement your unemployment income, there are consequences. The withdrawal is considered a hardship and isn't subject to the standard 10 percent penalty, but your plan was funded and how much you received will affect your unemployment payments.

Taking the Distribution

The Internal Revenue Service includes employment separation as an allowable hardship withdrawal reason, and this allows you to withdraw a portion or a lump sum of your 401(k). Keep in mind that these distributions will be added to your income taxes and taxed at your current rate. They'll also be counted against your unemployment benefit, according to Onecle.com. Depending on how your 401(k) was funded, Massachusetts will deduct half or all of the distribution from your unemployment benefit. If you and your employer contributed to the plan, then half is deductible; plan payments that were fully funded by your employer are fully deductible. Lump sum distributions are divided into weekly payments and last until the distribution is fully accounted for.

Taking a Loan

Another option may be to take a loan against the 401(k) plan. Loans are not distributions. They aren't taxed, and you don't have to have your credit checked. You repay the loan to yourself -- with interest -- over time. Keep in mind that if you default on the loan repayment then the loan turns into a withdrawal and becomes subject to the 10 percent penalty. If you're not yet working and you're still receiving unemployment, then this may affect your benefits. Speak to a Massachusetts unemployment advisor and your former employer before taking a loan or a distribution to find out how these payments will affect you personally.

Other Retirement Benefits

The distributions you receive from a 401(k) aren't the only retirement benefits that affect Massachusetts unemployment payments. Any retirement benefit or pension qualifies, with the exception of Social Security. If you receive Social Security, those benefits do not count against your unemployment payments; in other words, you can receive Social Security benefits without worrying whether or not they'll affect your eligibility for full unemployment payments. However, any pension, annuity or work-related retirement payment counts against your benefit.

Tax Consequences

The distributions you receive from an employer-sponsored retirement plan such as a 401(k) are added to your income and will be taxed by the Internal Revenue Service according to your income tax bracket. In 2011, this could be as high as 35 percent. Although state or local government pensions are exempt from Massachusetts income taxes, private pensions aren't. Massachusetts taxes income at a flat rate of 5.3 percent of your federal adjusted gross income. Unemployment income, on the other hand, is taxed at 10 percent.