We have no control over whether we are laid off by our employers. What we do have control over is how we manage our accumulated retirement assets should this happen. Here is how we should approach the situation, should we ever find ourselves in it.
Step 1: If you are laid off, avoid the first temptation to cash out the retirement plan. This can involve huge tax consequences. There are other ways to get by while looking for the next job, such as doing temp or contract work. Home equity lines of credit or loans, savings accounts, and your Roth IRA contributions are other good sources of funds.
Step 2: Those who have a balance greater than $5,000 in the existing retirement plan may be able to keep the money where it is. The tax-free or tax-deferred compounding will continue. Account holders will not be able to continue contributing but they will be able to re-allocate the money amongst the investment selections offered by the plan.
Step 3: Cashing out involves having the money paid either in a lump sum or as installments over a certain period. The lump sum method results in federal and state taxes and penalties that can reach up to 50 percent. Cashing out using the installment method does not involve penalties or withholding. Plan participants should seek assistance from a financial advisor if they wish to do this.
Step 4: The money can be moved into another qualified retirement account as either a direct or indirect rollover. Balances from a traditional plan may only be rolled into traditional IRAs. Balances in Roth-type plans may only be rolled into Roth IRAs. A direct rollover involves transferring the money directly from the former plan to the new plan. An indirect rollover involves taking a cash distribution minus 20 percent withholding. The individual must redeposit the money into the new account within 60 days of its withdrawal in order for taxes and penalties to be avoided. In this case, the individual will need to fund the 20 percent withheld when the money is reinvested or he or she will face a ten percent distribution penalty.