If you're one of millions of workers who lost their jobs in this difficult economy, it's critical to keep your retirement nest egg intact. Amid all the uncertainty, here's something you can count on: No matter what happens to your job, the money you have in an employer-sponsored retirement plan belongs to you. Even if the company you worked for goes under, your retirement plan balance is still yours. Interestingly, the biggest risk to your retirement plan – especially in a bad economy – is you.Unemployed workers are quick to raid retirement savings to help pay the bills. However, withdrawing retirement money before retirement age is costly – after taxes and penalties, you'll end up with a fraction of what you could've had in retirement.
Cashing Out Is Costly
Here are some drawbacks of taking a lump-sum distribution from your retirement plan:
- Taxes will be due on the total distribution, up to 35% depending on your tax bracket. Your employer is required to withhold 20% of the balance for tax purposes.
- A 10% IRS penalty may be assessed for withdrawal before age 59½ (or 55 if separating from service).
- Reduced retirement balance. You may end up working more years to make up for lost savings and compounded returns.
The new legislation provides a subsidy to make COBRA more affordable. Employers will be reimbursed for paying 65% of COBRA premiums for up to nine months for eligible workers terminated between Sept. 1, 2008, and Dec. 31, 2009. Your former employer is responsible for contacting you and providing an opportunity to enroll in COBRA, even if you initially
opted out.
Keep your retirement savings on the clock even when you're not, with these tips:
Explore other options for generating cash. Trim expenses on everything from gas and groceries to insurance premiums. Consider refinancing loans and take advantage of low interest rates if appropriate.
Know your vesting schedule. Matching contributions
from your employer must be vested before they are permanently yours. Some plans are fully vested immediately or after two or three years of employment, others impose a gradually increasing schedule based
on job tenure. Ask about your vesting schedule and how this affects your account balance.
Avoid taking a lump-sum distribution. Instead, consider these options to preserve your current balance and allow the funds to continue growing tax-deferred:
- Leave the money in your old employer's plan. If your balance is $5,000 or more, you'll be able to maintain your account (but not make any additional contributions).
- Transfer the balance to a new employer's plan when you get a new job. This option is not offered by all plans.
- Roll over your funds to an individual retirement account (IRA).* This option may allow you more investment choices and greater control over the management of your retirement dollars.
Ask for Advice
| * | Taxes will be due upon withdrawal at ordinary income tax rates. Withdrawals prior to age 59½ may be subject to a 10% tax penalty. |
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