Q: I’ve recently been laid off from my job . .. I had been working there for nearly 15 years. Can you give me some tips on the best course of action during a layoff with regard to my 401(k) company retirement plan?
A: In today’s economic environment, layoffs have become increasingly prevalent across a wide spectrum of the American labor force. You have several options for your former employer’s 401(k) plan, which are highlighted below. And my best wishes for hopefully better days to come for all of us this year!
Today, most employers offer departing employees the choice of a “lump-sum” distribution from their retirement plans when they separate from service. This single payment represents years of hard work and carries with it the hope of a long-awaited, well-financed retirement.
You may be tempted to use your retirement-plan assets as a source of current income during your period of unemployment. This move could cause dire consequences to your long-term security. For example, consider that most of the funds distributed directly to you will be subject to taxes and will incur a possible penalty. Before you make any irrevocable decisions regarding your company retirement-fund distributions, you should speak to your professional advisers to review your available options for managing these funds.
There are four common options for receiving your retirement-plan assets. Each is summarized below.
1. Roll over the funds into an IRA
By rolling your company retirement funds into your own IRA, your funds will retain their tax-deferred status. Depending on the investment firm you use for your rollover, you may have access to a wide range of investment choices and the ability to tailor a portfolio that is most appropriate for you. An IRA may allow greater flexibility in customizing your beneficiary designations. You could also structure a payout plan, to begin at any age, which avoids the usual early-withdrawal penalties. To help you decide what works best in your circumstances, you should have the services of a professional adviser who will work with you to design a retirement-investment portfolio that is most appropriate.
2. Leave your account with your former employer
If the balance in your employer’s plan is above $5,000, you will have the option of leaving your retirement assets in that plan. Each employer has different rules for the management of funds left behind by former employees. You may find that your employer may not offer the same range of services that you had while you were employed. Be sure to get a copy of your former employer’s retirement-plan document so you can review the terms that impact the management of your investments.
3. Take the money out of the plan by having it sent to you
If you receive the proceeds from your company retirement plan directly, it is considered taxable and 20 percent will be withheld for anticipated taxes. You have 60 days to add back the withheld 20 percent from your own funds and roll over the entire amount into an IRA or other tax-deferred retirement plan. The 20 percent that your company withheld will be refunded to you when you file your income taxes for that year. If you are planning to roll over your company retirement plan, the easier course of action is to have your company transfer the funds directly to your new plan.
4. Roll the money over to a new employer’s plan
Do you have another job that offers an attractive retirement plan? Will your employer allow outside retirement funds to be transferred into this plan? As with your former employer’s plan, any subsequent employer’s plan may lack the flexibility you could gain with your own IRA. Therefore, consider rolling your former employer’s funds into an IRA. By doing so, your funds remain tax-deferred and are positioned for future growth potential. If your future employer accepts rollovers into the company retirement plan, this option would still remain open for you to exercise in the future.
As always, I recommend speaking to your advisers, who will better understand your specific situation, to guide you in making the best choice.
Jeremy Gussick is a financial advisor with Smith Barney in Center City, focusing on financial and investment planning for the LGBT community. He actively serves on the boards of several local LGBT organizations, including the Delaware Valley Legacy Fund, the Greater Philadelphia Professional Network and the Independence Business Alliance, Greater Philadelphia’s LGBT Chamber of Commerce. OutMoney appears monthly. Jeremy can be contacted at (215) 238-5849 or [email protected]
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