How to Keep Your Nest Egg Intact After a Layoff
Unexpected job loss -- stressful as it is -- comes with another headache: what to do about your 401(k). Without careful attention, there are plenty of taxes and penalties that could shrink your existing retirement account balance. Here is how to keep your retirement stash intact when your job is eliminated.
Find out if you are vested.
All the money that you deposit into a 401(k) still belongs to you after a
layoff. But you can only keep your employer's contributions if they are vested. Only about a third of
401(k) plans provided immediate vesting in 2008, which means employees can keep a 401(k) match when it is
deposited, according to a
Make your move.
You have several options to maintain the tax-deferred benefits of your 401(k) when you leave a job: You can keep the money in your old employer's plan, roll it into another tax-deferred account such as an IRA, or transfer your balance into a new 401(k) when you land your next position. Transferring your old 401(k) balance to an IRA makes sense when the IRA offers better investment choices and lower expenses than your old 401(k) plan. But you may want to leave your 401(k) funds with your former employer if the company has negotiated low investment fees on behalf of employees.
Avoid transfer penalties.
If you decide to move your retirement savings, have your former employer directly transfer the money into an IRA or your new employer's retirement plan. "Have the check made out to the institution where it is going instead of the check being made out to you," says IRA expert
Consider your age.
IRA withdrawals before age 59½ result in a 10 percent early-withdrawal penalty. However, retirees can begin taking penalty-free 401(k) withdrawals at age 55. "If there is any possibility that you might need that money at age 57, you want to leave it in that 401(k) plan," says
Leave employer stock behind.
The stock of the company you work for gets special tax treatment when it is held in an employer-sponsored 401(k). "If you roll over the stock to an IRA, the deal is off forever," says Slott. When you withdraw company stock, the original cost of the shares will be taxed as ordinary income, but the appreciation of the stock is not taxed until you sell it (then it's taxed at the long-term capital-gains rate of 15 percent). If company stock is rolled over to an IRA, appreciation is taxed at the typically higher ordinary income tax rate of up to 35 percent when withdrawn from the account.
Think before you cash out.
Almost half of laid-off workers who left their job in 2008 cashed out their 401(k), according to a
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Personal Finance - How to Keep Your Nest Egg Intact After a Layoff
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