Managing Retirement Cash Now that You’ve Been Laid Off
Managing retirement cash now that layoffs are common can be tricky. Being laid off is not an employee’s fault. The economy is creating more and more issues for businesses and often the only option is to let go of good employees when finances get too tight. If you are laid off, there are some ways you can protect your retirement assets. It’s important to take the necessary steps to safeguard savings.
Many workers choose to cash out when they are laid off. Though this may be an immediate solution, it isn’t always the right decision. Cashing out is expensive and involves taking on a big tax liability. The reasoning is different for a consumer, though. They believe that taking a small unemployment check combined with a long period of job searching is just too much to deal with. In today’s market, the average unemployed American has been looking for work for 14 to 17 months. That’s a long time and many consumers are considering taking as much emergency money as they can upfront to make it through as many months of bills as they can.
If you are laid off and are considering cashing out, remember that you will be penalized. You may have a good chunk of money to make it through the time of unemployment, but your retirement savings will be gone. There are some other options to consider before cashing out.
Evaluate the other options
If your company downsizes and lays you off, there are normally three things to do with your retirement money:
- You can leave it in the existing account
- You can take the lump-sum
- You can transfer the money to another retirement account
If you choose to stay with your existing play, it normally means your balance is over $5,000. This is the best way to avoid taxes and continue compounding interest without interruption. You won’t be able to contribute to the plan, but you still have a say in how the money is invested. The good news is that keeping it live means that you keep reaping the benefits of what cash now is saved.
The other option is to cash out the retirement account. Though this may seem like a good idea to have some cash to fall back on, it isn’t always the best long-term option due to the repercussions. There is a 20% withholding on the pre-tax contributions and earnings portion of the eligible rollover distribution. The rollover distribution is what the plan has to pay the IRS to cover the federal taxes. There is also a 10% withdrawal penalty for the cash out.
Finally, there is the roll-over option. You can move your retirement plan to another account using a “direct” or “indirect” rollover. With the direct rollover, the money goes directly from the current employer’s retirement plan to the new one. With the indirect rollover, you’ll get the cash distribution, less a 20% withholding fee, but you have to redeposit the qualified plan assets to another IRA within a 60-day time period. When the money is invested into the new IRA, you’ll have to replace the 20% withholding with an out-of-pocket deposit.
Decide what is best
Managing cash now is difficult, but when you add a lay-off to the mix, it can be twice as hard. There are options with retirement funds and each one comes with strict rules. Be sure to assess your individual situation and decide which option is best for you.