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.
Protecting the 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 choose to take some money from your retirement accounts. Just remember there will be federal income tax consequences, and if applicable, penalties may apply.
Generally, you have four 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 other hand, your existing employer plan likely has lower fees than other investments options, including IRAs. 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.
- 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 participants may be eligible to 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 may also lose any future tax-deferred growth potential of the account.
- 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. Be sure to compare the fees and features of your new and existing plan to help you make your decision.
- Roll savings into an IRA. An IRA may offer more flexibility and investment choices. You may be eligible to consolidate other retirement savings – either from former employer-sponsored plans or from other IRAs – into a single IRA. However, the fees associated with an IRA may be higher and unlike an employer-sponsored plan, you cannot take a loan against an IRA.
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 advisor or financial professional 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 investment adviser representatives and registered representatives of, 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.