Managing Retirement Assets in the Event of a Layoff

Being laid off is often unavoidable. But losing your retirement nest egg at the same time can be prevented. Find out what your retirement savings plan distribution options are and identify some better short-term funding sources.

In the Event of a Layoff...
These days, layoffs are a fact of corporate life as companies try to grapple with economic cycles and global competition. One of the first choices laid-off workers face is what to do with their retirement plan assets. Many, confronted with the prospect of meager unemployment checks and a long job search ahead, opt to cash out of their plans.But cashing out is expensive, involving a large tax bite and forfeiture of one's hard-earned retirement nest egg. Moreover, there are far better ways to make ends meet while unemployed than dipping into retirement savings.

Evaluate Your Options
If you get caught in a downsize and you're not immediately moving to a new company, you generally have three options for your retirement plan assets: (1) leave your money in the existing plan; (2) take a cash, or a "lump-sum," distribution; or (3) transfer the money to another retirement savings account, such as an individual retirement account (IRA).

Consider Other Short-Term Funding Sources
During times of economic hardship, it may be tempting to take money intended for future needs and use it to supplement a temporary income shortfall. But before choosing a retirement plan cash distribution, look hard at other potential sources to meet your current income needs. Some of these might include:

Savings accounts or other liquid investments, including money market funds or other easily liquidated investments. With short-term interest rates at historically low levels, the opportunity cost for using these funds is relatively low.

Home equity loans or lines of credit are an excellent way to tap into the equity in your home. Not only do they offer comparatively low interest rates, but interest payments are generally tax deductible. The best approach here may be to set up an equity line of credit beforehand, while you are employed, so that funds will be available when you need them.

Roth contributions. If you do find it necessary to resort to using some of your retirement savings, consider first cashing in the contributed portion of your Roth-style plan or Roth IRA, if you have one. Amounts you contributed to a Roth-style plan or Roth IRA can be withdrawn tax and penalty free, since you've already paid taxes on them.If, after everything else, you still find it necessary to cash in your retirement savings plan, consider rolling it into an IRA first, then withdrawing only what you need. Also, try to time it after year-end, when you may be in a lower tax bracket. But remember that any funds you take out today will ultimately reduce your retirement nest egg tomorrow.

Compare Retirement Plan Distribution Options
By leaving your money in your former employer's plan...you may keep your long-term goals on track by continung to pursue tax-deferred growth potential.By taking a lump-sum cash distribution... you may satisfy an immediate need for cash, but impede the long-term growth potential of your retirement portfolio and expose yourself to substantial tax liabilities and premature withdrawal penalties.By making a direct rollover to an IRA... you will continue to pursue tax-deferred or tax-free growth while potentially having greater control over the assets.