Whether it’s labeled downsizing, restructuring, a layoff or a cutback, anyone who has ever lost a job will be the first to tell you – it hurts. And despite everyone’s best intentions, there really is no way to sugar-coat this particular pill. But it’s important to try and keep a level head during a trying time. After all, you’re going to have to make some big financial decisions.
Know your severance package
The days of getting nothing but a pink slip and a cardboard box for your things are gone. Most companies offer some sort of severance package, which may include:
- Pay, bonus or incentives — Find out about special conditions or offers, and how to apply for them.
- Health insurance — Ask about continuing your health coverage, including premium costs and how long you and your family can remain covered.
- Other benefits — See if benefits such as tuition reimbursement and life or disability insurance will continue.
- Unemployment compensation — Ask if you qualify for unemployment insurance benefits.
Protect your retirement savings
Be upfront with your lenders about your situation. Many times lenders may offer more flexible repayment plans to help your immediate cash flow situation and mitigate the need to tap your long-term retirement assets. But if you have tapped all your other resources/options and you still need to cover your basic living expenses like food, shelter and medical expenses; you may need to take some money from your retirement accounts. Just remember there will be federal income tax consequences, and if applicable, penalties may apply.
Even though you may need the money, cashing out your retirement plan account is generally a bad idea in the long term. First, if it’s a non-Roth account, you’ll owe federal income taxes on the money. If you’re under age 59½ you may also be subject to a 10% additional tax (for both Roth and non-Roth accounts), unless an exception applies or the withdrawal is from a 457b plan. And, you’ll lose the tax-deferred growth potential of your savings.
Generally, you have three options for keeping your retirement plan potentially growing when you leave your job:
- Leave the money alone — Many employer plans allow you to keep your money invested even after you leave the company. While this may look like the easiest solution, there may be other considerations to think about. You’ll be subject to your old employer’s plan rules, and you may not be able to borrow against your account balance. And obviously, you won’t be able to make any more contributions even when you find another job.On the positive side, if you're happy with your former employer plan's investments or you need time to decide what to do with your money, leaving your funds in the old plan, growing tax deferred may be a good idea.
- Take it with you — You can generally transfer your money from your current plan directly to a new employer’s plan, if available, or to an Individual Retirement Account (IRA).
- Roll savings into your new employer-sponsored plan. If you have a new job, you may be able to roll your existing account balance into your new employer-sponsored plan. Usually these plans charge lower fees than an IRA, may have benefits and services that are not available with an IRA, and offer creditor protections, but you will likely have less control over your investment options.
- Roll savings into an IRA. Roll your retirement plan assets into an IRA. An IRA may offer more flexibility and investment choices. You can consolidate other retirement savings – either from former employer-sponsored plans or from other IRAs – into a single IRA. Having a single account to manage makes allocation and rebalancing easier. You’ll also gain greater control of your money and how it’s invested. However, unlike an employer-sponsored plan, you cannot take a loan against an IRA.
Cash out of your plan
Especially during a job loss, it may be enticing to cash out your account under the plan, however this comes with a hefty price. By cashing out a non-Roth account now, you’ll pay a 20% federal income tax, and a 10% additional tax if you are under age 59½ unless an exception applies. Different rules apply to cashing out a Roth account. Since contributions are made on an after-tax basis you can withdraw contributions without owing taxes or a penalty however withdrawals of earnings prior to age 59½ and holding the account for 5 years will be subject to income taxes and a 10% additional tax unless an exception applies. In both cases, you’ll also lose any future tax-deferred growth potential of the account.
What’s your next move?
Many people are able to turn a job loss into an opportunity. Ask yourself what you really want to do next. Did you love your last job? Do you want to continue it with another company? Have you thought about going back to school for another career? How about starting your own business? If ever there was a time to make a change, it’s now. Whatever you decide, a Voya Financial Advisors retirement consultant can help.
Carefully consider the provisions of your current retirement plan and the new product for differences in cost, benefits, surrender charges or other important features before transferring assets. You should consult your own legal and tax advisors regarding your situation.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.
The information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Voya Financial Advisors retirement consultants are registered representatives and offer securities and investment advisory services through Voya Financial Advisors, Inc., member SIPC.
Neither Voya nor its affiliated companies provide tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.