Survival Strategies After You’re Laid Off
What would you do if you lost your job tomorrow? There are some survival strategies that may be just what you need.
One: Find out what your unemployment benefits are, and apply for them immediately. If you delay, you could lose benefits.
Two: Lock up your credit cards except for emergencies. Contact your creditors and tell them you’ve been laid off. Ask them for an arrangement where you can pay a smaller amount for a limited period of time. Many companies will comply if you ask.
Three: Cut and prioritize your expenses. Your mortgage and car payments are top priority. Next, pay utilities, and after that, pay what you can afford. Luxuries like cable TV, manicures, cell phone, or restaurant dinners must go.
We always hope that our next job change will be by our own choice for a better position or a new career, but if you find yourself suddenly pounding the pavement, these strategies may help you get through till you’re back on your feet.
Using Your IRAs
Ask your financial planner if it’s feasible to use any available money from a qualified plan your might have, and put it into one IRA. You could then use the “substantially equal withdrawals” option to withdraw money without the 10 percent penalty.
The money in your 401(k) is probably the largest pool of accumulated wealth you have. One of the biggest decisions you must make is what to do with your 401(k) funds when you change jobs. It’s a good idea to take some time deciding your options. Cashing out is not a good idea because of all the money you’ll lose. Rolling over to an IRA has much good merit that we’ll discuss. You can also decide whether you should stay or go with your employers.
These are all weighty decisions that you should spend some time researching before you make your move. Learn about the pros and cons of each option and base your decision on an educated perspective.
Determine Your Vesting Status
Before you move your retirement fund, find out if you are vested. Vesting simply means the percent of funds that your employer contributes to your retirement plan to match your contributions. The vesting period can typically extend over a few years, depending upon your employer's plan. At that time, you could become 100% vested. Your employer can also contribute matching funds after a period designated by the employer-sponsored plan.
If you leave your employer’s plan prematurely, you may lose the “free” money you would have received if you stayed until you were fully vested in the plan. Find out the particulars of your employer’s vesting arrangement before you move your money by asking Human Resources, or reading your retirement plan literature.
Retirement Fund Rollover Options
If you are laid off and have a 401K or other employer-sponsored retirement plan, you have four choices for rolling the funds over:
- Cash out & take the money outright
- Keep the money in your previous employer’s 401(k) plan
- Transfer the money to your new employer’s 401(k) plan
- Roll over your 401(k) plan into an Individual Retirement Account (IRA)
As tempting as it is to take the money and run, taxes and penalties outweigh the benefits of instant cash. This is the worst option you can choose, and here’s why:
Let's say you have $100,000 in your 401(k) plan. You decide to cash out the money. Your plan administrator will automatically deduct 20% for taxes as required by law. You will receive a check for $80,000.
The problem is, by law in order to keep this $80,000 from being taxable, you have to roll it (together with another $20,000) into an IRA within 60 days. So, by the end of 60 days, you will have to cough up $100,000 to put into an IRA.
If you can’t come up with $20,000 within that sixty day period, the remaining $80,000 will be taxable. The IRS will count the $20,000 as a tax distribution from your plan. They will tax it and then hit you with a 10% penalty.
Then, you may find that you are in a higher tax bracket than the 20% that your plan administrator withheld from your funds. If so, you may have to pay the difference between the 20% and 31%, or an additional 11% on the original amount, which in this case would be $11,000!
Cashing out can be expensive.
That $100,000 nest egg is subject to federal income tax and could be subject to state and local taxes as well.
You will face a 10% IRS penalty for withdrawing the funds if you are under age 59 ˝ at tax time.
You might have to pay sales charges or surrender fees when liquidating your investments.
Weighing Your Other Options
- Once you’ve decided to try one of the three remaining options, consider which option will provide the best potential for income tax-deferred growth: an IRA rollover, an old employer's 401(k), or a new employer's 401(k). Here are some factors to consider before choosing one of these options:
- Investment Options: Determine which plan will provide the greatest latitude with investment options.
- Fees and Expenses: Calculate what the fees and other expenses are for each type of plan. Staying with your old Look at your new plan. Does it compare favorably with your old plan? What are the advantages to putting your money into an IRA?
- Protect your Money from Creditors: Determine if your creditors can access your 401(k) account or your IRA. Find out where your money will be best protected.
- Accessibility of Cash: Which option has the easiest access to cash in the event you want to borrow money against it in the future: a 401(k) or an IRA?
Retain the Money in Your Previous Employer’s Plan
Your previous employer may allow you keep your funds in your old plan if you haven’t decided where to put your 401 (k) funds, and if you have at least $5,000 in your 401(k) plan.
If your new employer doesn’t offer a 401 (k) plan, this may be a good option, particularly if you are satisfied with your old plan. The money is safe, plus you’ll avoid the financial pitfalls that result from cashing out
Things to Consider if You Stay with the Old Plan
- There may be disadvantages to staying with the old plan, particularly if your new employer’s plan offers similar or better investment options. Here are things you might consider:
- Compare variety & quality of investment options of your old plan to your new employer’s plan
- Check policy changes for ex-employees, as there may be additional maintenance fees.
Move Your 401(k) Funds into Your New Employer's Plan
If your employer offers a 401 (k) plan, find out when you will be eligible to participate. Consider leaving your funds with your old employer if there is a waiting period.
When you do become eligible, make sure that the rollover checks are written directly to the new plan administrator. Make sure the checks aren’t written to you, or you will suffer all the dire consequences of a cash-out, including the 20% deduction, and all the taxable headaches that follow.
Things to Consider if You Go with the New Plan
Here are a couple of considerations to think about if you decide to move to your new employer’s plan:
- Are the investment options better?
- Does this plan have lower fees?
- Does the employer match funds sooner or have a better vesting schedule?
Rolling Over Money into an IRA
Opening a rollover IRA is a good choice if you can’t or don’t want to leave your money with your previous employer’s plan. Almost every bank offers rollover IRAs, and with IRAs, you have a wide range of stock and mutual fund investment choices.
By considering all of the implications discussed here, you can wisely evaluate the impact that changing jobs might have on your retirement savings, and make the most informed decision.
Things to Consider when Rolling Over into an IRA
IRAs have more flexibility of investment options, and often will allow investment options that 401(k)s don’t allow, including real estate and some collectibles.
Rollover Versus Transfer
A rollover occurs when you take the cash in an account and move that money to another plan.
A transfer occurs when the money goes directly from one trustee of a plan to another trustee of a plan. The money from your old plan goes straight into your new employer’s plan, or into an Individual Retirement Account that you set up with a trustee. There is no 20% withholding and no 10% penalty
Co-Mingling of Retirement Assets
Co-mingling of retirement assets occurs when you withdraw your money from your old retirement plan, and put it into an existing IRA.
Be careful! If you move money from a retirement plan, and co-mingle them by putting them into an existing IRA plan containing other money, you can never put those dollars into a new employer’s plan.
In the event that you decide to withdraw your retirement money from your old employer, you can establish a conduit IRA. A conduit IRA has the expressed purpose of holding retirement plan dollars from your old employer until you can transition the money into a new employer’s plan. Keep your money there until you decide whether you like the benefits of the new employer’s plan. Then you can remove the money from the conduit IRA, and deposit it directly into the new plan.