Preserving What You Have Saved After Layoff

Monday, March 9, 2009, 6:53 AM | Leave Comment

Since the start of the recession, more than 3 million people have lost their jobs, according to the Bureau of Labor Statistics. Are you one of them? If you are, then you ought to make decisions about your personal finances and the sooner the better. In addition to making decisions about your health and insurance benefits, you will also need to determine what to do with your company-sponsored retirement plan, specifically 401(k).

Your situation at the time you left the company

As long as you remain unemployed – let’s hope you and others get jobs soon, you cannot contribute to your 401(k) which remains as a company-sponsored plan. However, your now ex-employer may still be obligated to maintain it for your benefit. There are some exceptions to that fact.

  • Your 401(k) has less than $1,000
    If your company retirement account has less than $1,000 in it, your employer will close it out and send you a check for the balance. You can still avoid paying taxes on this amount if you reinvest it in an IRA within 60 days.
  • Your 401(k) has between $1,000 and $5,000
    If your account has more than $1,000 but less than $5,000, your employer can automatically roll those assets into a “Safe Harbor” IRA at a provider chosen by them.
  • You have borrowed from your 401(k)
    If you have borrowed from your 401(k) and still have to repay, some companies will make you take the outstanding amount of the loan as a lump-sum distribution, which is subject to ordinary income taxes. And if you are under age 55, you may also pay a 10% early withdrawal penalty.
  • Check with your plan administrator
    The first step is to check in with your 401(k) plan administrator to make sure that they don’t require you to take a direct withdrawal or assess administrative fees for failure to act on the account.

What you can do now?

You have two options. Either one, in general, may be OK. Before you take a certain path, talk to your financial adviser.

  • Leave it with the now ex-employer
    If you are 55 or older, most 401(k) plans generally allow you to access your balance without an early withdrawal penalty. That’s one of the reasons you might choose to keep your money in their plan.
  • Rolling it over to an IRA
    Another option is to roll over your assets to a Rollover IRA via a direct trustee-to-trustee transfer. This helps you avoid the 60-day time limit and mandatory 20% tax withholding that’s required if you don’t transfer assets directly.

In a Nutshell
Avoid cashing out if you possibly can. Most financial gurus advise against taking the savings in your 401(k) as a lump sum in cash, not only because of the taxes and penalties that will be due, but also because of the lost opportunity. Once you take the money out, it stops compounding earnings on a tax-deferred basis.

If you have other savings or benefits, an emergency fund, or a severance package to help cover current expenses when you’re between jobs, so much the better. In that case, follow one of the above two options.

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