With all the talk of Michigan having the nation’s highest unemployment rate, 12.9 percent according to the Bureau of Labor Statistics, and the news of a major Michigan based company filing for bankruptcy? one may be starting to consider their financial situation and retirement savings accounts.
The unfortunate trend of corporate layoffs has forced many people to think about their financial future and in some cases, survival. Employed or not, it’s important to have a plan in the event you find yourself jobless.
Key decisions will have to be made almost immediately, such as where the income to cover living expenses will come from and what to with the 401(k) you’ve been using to save for your retirement.
If you find yourself without a job unexpectedly, the temptation to take funds out of, or take a loan from, your retirement account may seem like an easy solution to your financial problems.
But in all reality, using your retirement savings account as a financial life preserver has short-term and long-term financial consequences.
Whatever your situation, there are a few need-to-know tips regarding your retirement savings account in the event the unexpected happens to you.
Understand 401(k) Loans
Loans taken from 401(k) accounts have to be paid back with interest no later than 60 days after employment termination. Defaulting can result in added tax liabilities and penalties.
Also, the withdrawn money is no longer growing for retirement and you will now have to play catch-up in order to retire on time. 401(k) loans are not transferable and cannot be rolled over to another plan.
Evaluate Your Options
If you find a job within 60 days, consider rolling your 401(k) over to the new company sponsored plan and take advantage of benefits, like fund matching, that may be offered by your new employer. If considering an IRA rollover, keep in mind that?
Traditional IRAs allow tax-deductable contributions and offer a variety of ways to invest.
Penalty-free withdrawals if you are 59 ? or older, but if you withdraw before age 59 ?, there is a 10 percent penalty on the amount taken out.
Minimum withdrawals are required by the age of 70 ?, even if you don’t need the money for retirement. Taxes are owed on the withdrawal amount.
Roth IRAs don’t have a mandatory age to begin withdrawals. Funds can be invested in many different ways and all earnings and principal are 100 percent tax-free upon withdrawal.
Although contributions are not tax deductable, paying taxes on the amount invested today versus the withdrawals made in retirement may prove to be a profitable decision, as tax rates are likely to increase. Roth conversions do come with income restrictions, but in 2010 these restrictions are being lifted.
Know HOW to Rollover
When rolling over, the conversion has to be ‘qualified? and direct to avoid the 20 percent withholding trap. Meaning, don’t take the account distribution in your name – or the company will hold 20 percent for taxes and if you’re under the age of 59 ?, there will be an additional 10 percent fee.
Plan a ‘trustee to trustee? rollover with a bank or brokerage house. Notify your former employer’s retirement plan administrator you are making a direct rollover and deposit the funds in the rollover account within 60 days.
Facing unemployment or a financial hardship is going to cause a great deal of stress. But, by staying on top of your money and having a contingency strategy in the event of the unexpected, your retirement savings plan will be able to continue working, even if you are not.
David Boike owns Retirement Resources tax, mortgage, and financial consulting practice in Clarkston with his sons, D.J. Boike and Jake Boike. Call 877-732-5751.