Life is filled with stress, and both financial and emotional change in the workplace and at home — expected or not — can certainly increase your anxiety level. According to the American Psychological Association’s annual Stress in America™ survey, money and work remain the two most commonly reported sources of stress, and losing or changing a job can be found at the top of any “life’s biggest stressors” list.
So how does this affect you in terms of planning for your retirement? What if you unexpectedly lose your job or even make a seemingly well thought-out career switch? If you have participated in a 401(k) plan or other employer-sponsored retirement savings plan, you have important decisions to make that can impact your retirement savings. This is where sound financial advice could make a difference. Consider some of your options below.
1) Rollover to an Individual Retirement Account (IRA):
A direct rollover preserves the tax-deferred status of your assets. This can be accomplished by communicating to your former employer that your retirement savings should be rolled over to your new IRA account. Once your account is funded, your financial advisor can discuss with you the many ways these funds can be invested to help meet your future goals.
2) Rollover retirement savings to your new employer’s plan:
In many cases, your retirement savings can be transferred into the retirement savings plan of your new employer. You may find that your new employer offers different investment options — sometimes more, sometimes less. Visiting with your new employer’s plan administrator can provide clarity of any investment options and enable you to make choices best suited to your goals.
3) Leave your assets with former employer.
This is an option only if permitted by your former employer. Please check with your previous employer’s HR department to determine the availability of this option.
4) Redeem your retirement savings plan for cash — but beware of the costs and penalties.
It is possible to redeem your retirement savings for cash prior to retirement age. Important to consider are a few associated costs and penalties: your employer is required to withhold 20% of the account’s value as a prepayment of taxes, and a 10% early withdrawal penalty may apply. All of the account assets will then be counted as income for the purpose of calculating your taxes. Typically, this is not your best option and is something you should discuss with your tax advisor.
Today’s economic challenges can be overwhelming, especially after an employment change or layoff. By being proactive in your financial future, you may save yourself a few sleepless nights and set your path to a successful retirement.
D.A. Davidson & Co. is not a tax advisor. Before investing in any IRA, consult with your personal tax advisor about the specific tax consequences and advantages of your situation.