If You’re No Longer With Your Company Then Your Retirement Savings Plan Shouldn’t Be Either


Announcements about the rising unemployment rate, company layoffs and massive corporate cutbacks continue to weigh down the American economy. The Bureau of Labor Statistics reported the national unemployment rate has risen to 10.2%. United States residents are undoubtedly scared, and many have had to think about their financial strategy if they were to find themselves jobless. For the millions of Americans who have already been laid off or forced to retire early, they’ve had to, almost immediately, make decisions regarding what they will do with their company retirement savings accounts.

People spend years contributing money to their IRAs and 401(k)s with the anticipation of not having to touch it until they are ready to retire. It’s tough economic times like these when people find themselves in a financial dilemma and their initial retirement strategy goes awry. The temptation of taking funds out of a retirement account becomes a convenient solution to a poor financial situation. More times than not, individuals using their retirement savings as their emergency savings fail to realize the potentially significant liabilities and serious consequences an early withdrawal can have on their financial, and more specifically, retirement futures.

For the working individuals, fortunate enough to have a steady income, it is best to be prepared and have a game plan for what you would do with these types of accounts if unexpectedly, became unemployed.

1) Understand Loans & 401(k)s

A 401(k) loan must be paid back (with interest) within 60 days of employment termination. Defaulting will result in additional tax liabilities and penalties. Monies withdrawn as loan, no longer grow for retirement. 401(k) loans are not transferable and cannot be rolled over to another plan.

2) Understand Your Current Account Value

On average, 401(k) account balances declined 18% in 2008, with reports as high as double, or more, in total account value loss for Americans across the country. Since these contributions were done “pre” income tax, rolling over a 401(k) now, at a reduced account value, does not provide any tax credit. Since no taxes were paid on the amount contributed to the account in the first place, there is no tax break for “realizing” the loss through account reallocation or rollover.

3) Review Your Options

• Rollover to New Plan. If you intend to find additional work, consider rolling over your 401(k) into the new company sponsored plan and take advantage of any benefits the new employer may offer, such as fund matching.

• Traditional IRA. Funds within a traditional IRA can be invested in a variety of ways, this account allows for tax deductible contributions. Withdrawals can begin by age 59 ½ without penalty, however before 59.5 there is a 10% early withdrawal penalty on the amount taken prematurely. Withdrawals from IRAs are mandatory by 70.5, even if the money is not yet needed for retirement living. Taxes are paid on the withdrawal amounts.

• Roth IRA. No mandatory distribution age, all earnings and principal are 100% tax‐free and funds within a Roth IRA can be invested in a variety of ways. Although contributions to a Roth IRA are not tax deductible, paying taxes on the amount invested today may prove to be profitable decision, as tax rates are likely to increase in the future. Although there are income restrictions for Roth conversions, available only to single filers making up to $95,000 or married couples earning a combined maximum of $150,000 annually, starting next year in 2010, these restrictions are lifted.

4) Understand HOW to Rollover

To avoid costly penalties and taxes, the conversion must be “qualified” and direct, this will help you avoid the 20 percent withholding trap. To have a “direct” transfer, do not take the account distribution in your name. The company will hold 20 percent for taxes and if you are under the age 59 ½, there will be a 10 percent penalty fee as well. Arrange for a “trustee to trustee” rollover with a bank or brokerage house. You must notify your former employer’s retirement plan administrator that you are making a direct rollover, and you must deposit the funds in the rollover IRA within 60 days.

5) Invest for Your Success

There are several investment options ranging from “conservative” to “aggressive” within a retirement savings plan. Be sure your retirement investment portfolio reflects your risk tolerance, level of comfort in investing and time horizon to retirement.

Facing unemployment, a layoff, or a financial hardship is always going to cause a great deal of stress, and the thought of having to make important financial decisions during these difficult times may can be overwhelming. It is always in your best interest to stay on top of your money and to ask lots of questions to gain a solid understanding of all of your options before making any financial decisions. You must do your homework. By staying involved and informed throughout the process, you can avoid paying taxes and fees when changing or moving these types of retirement accounts, as well as reduce unnecessary exposures to risks.

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