Laid Off Retirement Planning

If you’ve been laid off, terminated, or decided to leave your job, you may be wondering what to do with your 401k.

In this economy, some might be tempted to cash out because they need the money, but this is always the worst idea. When you are still working, most 401K plans will allow employees to borrow against their retirement and pay it back over 5 years, with interest. Unfortunately, when you’ve left your job, this option is no longer available. And taking the money out of your retirement savings means significant tax penalties. So what’s your best option when you’re short of cash?

Save Your Pennies For Retirement

Cashing Out

Cashing out your 401k is an absolute LAST RESORT for a number of reasons. First, with the decline of social security and pensions as retirement cushions, the 401k has become the sole option for many who depend on this employment-dependent plan. Consequently, cashing out your 401k could mean a tremendous setback for your retirement security, and would compromise your ability to leverage the compounding that would occur over time to increase your nest egg.

In addition, you will be taxed twice if you withdraw cash from your 401k before you turn 59 1/2. You will pay a 10% penalty on the front end, in addition to regular federal and state income taxes on the withdrawal at the end of the year.

(Some withdrawals can be made without penalty, but these usually require a true financial hardship, such as funeral expenses or foreclosure.)

Roll Over

Directly rolling over your retirement assets from a 401k to an IRA is nontaxable, and many IRAs have no annual account fee (this is something to double check with your plan administrator.)

An IRA will allow you to reallocate your investments just like a 401k, and make additional contributions. The benefits of rolling over to an IRA include:

• Access to a wide variety of investments
• No tax consequences or other penalties
• Continued tax deferral
• Ability to consolidate retirement investments in one place

Of course, most 401k plans allow you to leave your money in the account without rolling over. This is of course helpful if you are unemployed, and have nothing to contribute! It also saves you the hassle of dealing with a cash out and re-allocating your funds before it’s necessary. (Although you should routinely check balances and performance on your investment as a matter of course.)

If you’d like to investigate IRA tax implications further, go to www.irs.gov, and see the IRS document “Publication 590 (2008), Individual Retirement Arrangements (IRAs)”, and for more information on rollovers, see the IRS document “Topic 413 – Rollovers from Retirement Plans .”

You can also see IRS document “401(k) Resource Guide – Plan Participants – General Distribution Rules “ for more information on cashing out your 401k.