The dos and don’ts of retirement plans after a lay off

Since the economic downturn, more and more people have found themselves being laid off from work. But, if you were part of a retirement plan with your employer, for instance a 401(k), then what should you do with it if you are laid-off from your job?

Coming up are some of the dos and don’ts to help you decide the best course of action should you find yourself in this predicament.

DO…ask for help.

Company layoffs are a very complicated area and there are a variety of circumstances that can affect your severance package, including the size of the payoff you receive and what happens to your employer-offered benefits.

That is why it is a good idea to seek professional financial and legal advice if you find that you are being laid off. Be sure to pick a representative that has a good grasp of company and employment law and can go through your employment contract and enter into a dialogue with your employer about the details of your severance package, including things such as payment of unused holidays and the matched payment into your 401(k).

DON’T…rush into any decisions.

The stress of being laid off can make it easy to rush into decisions regarding your severance package as you don’t want to drag out any dealings with the company that is laying you off.

However, there are some very important financial decisions to be made that will have a direct impact on your future so you should take your time and seek advice on the best way to manage your benefits.

And don’t let your (former) employer hurry you along as if you have over $5,000 in your 401(k) you  can leave your (former) employer to sit on it until you are 65.

In the meantime you can determine whether to just leave the current plan running or open a new account, such as an IRA.

Again, it may be a good idea to seek professional financial advice at this point in order to ascertain what your best course of action is.

DO…be aware of your rights.

As mentioned earlier, company layoffs are a very complicated area and certain benefits are protected by law. For instance, if you are under the age of 59½ and you have been retired then you may be eligible for a 72T distribution which will enable you to access some of your 401(k) without paying the 10 per cent penalty fee.

Another instance whereby your 401(k) is protected is if you lost your job through a company-wide downsizing in which at least 20 per cent of employees were laid off. If this is the case then you are considered to be fully vested as you are part of a ‘partial termination’ of the 401(k).

As before, it is a good idea to seek professional advice on your rights.

DON’T…cash it in.

When you lose your job your whole world is turned on its head as you are facing the very real prospect of not being able to meet the demands of your personal finances. And because so many people are worried about how they will meet the repayments on mortgages, loans or credit cards when they are out of work, they cash in their 401(k) to give themselves some breathing space and meet the urgent bills.

However, when you cash in your 401(k) you leave yourself open to taxes and penalty fees and you also lose any cumulative savings benefits.

Once again, it is worth seeking professional advice at this point to work out the best way to grow your savings.

This article was provided by Andreas Nicolaides, a personal finance author at UK-based MoneySupermarket.com.

Thanks,

MR