Protecting your retirement benefits during a job change
Losing a job is one of life's most stressful experiences. As companies downsize, you may find yourself facing a pink slip. Here's how to protect your retirement benefits if you lose your job.
Choose your options
You have several choices for what to do with the vested portion of your nest egg when you leave your company. The most common options are:
- Roll your retirement funds into an IRA. This gives you the greatest flexibility and protection from taxes, as well as the benefits of tax-deferred growth. However, if you are vested with PERF, you will lose your right to a lifetime pension benefit if you withdraw your funds from PERF. To avoid penalties, your retirement plan assets must go directly into an IRA - not to your bank or other accounts - within 60 days after you receive the money. Otherwise, your plan is required to withhold 20 percent of an eligible rollover distribution for taxes. You will then have to make up the 20 percent when you open your rollover account and pay a 10 percent penalty tax on the amount. If you decide to roll your retirement plan assets into an IRA, your money must go into a regular IRA, which you can convert later to a Roth IRA.
- Roll the money over to a new employer's retirement plan. This option can help you keep your retirement savings on track. Keep in mind that the investment options in the new plan will be different from those in your old plan. Also, if you are vested, you will lose your right to a lifetime pension benefit.
- Leave the money in the existing plan. If your vested account balance is $5,000 or more and you're under the plan's normal retirement age - usually age 65 - you can leave your money where it is. Taxes won't be due until you withdraw money from the account.
- Take a lump-sum distribution.This gives you the freedom to do whatever you want with the money. But beware: at the time you cash out, you will owe all applicable taxes. If you're younger than 59-1/2, you'll pay a 10 percent penalty plus state and federal income tax on the full amount of your distribution (including the penalty.) This choice may also affect your ability to receive unemployment compensation, so check with your state. Also, if you are vested, you will lose your right to a lifetime pension benefit.
Make requests in writing
Send your request to the plan administrator via certified, first-class mail. Ask about the status of your retirement account. You'll also want copies of all retirement plan documents and benefits statements in your file.
Keep money invested
While losing your job can have a significant impact on your finances, try to avoid tapping into your retirement savings. Penalties and taxes for early withdrawal can be expensive. And while you may not be able to contribute to your retirement account while you're out of a job, you'll see the benefit of tax-deferred growth over the long term.
Jobs will come and go. The best way to protect your retirement benefits in case you're laid off is to plan ahead. Sit down with your financial adviser and talk about how much you have and what options are available to you. And if you haven't done any retirement planning up until now, it's never too late to start.
