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If you get laid off or "downsized," it's unquestionably a tough break, and it can be stressful in many ways. However, if you make the right investment-related moves, the loss of a job doesn't necessarily mean you have lost the opportunity to achieve your important financial goals. Above all else, don't panic when you learn of an impending termination. If you are going to get a severance package, you may not have to take the first offer that comes your way; you might be able to negotiate for more attractive terms. But even if there is no room for negotiation, you need to make sure you get all the information you need, such as whether the severance will be paid at once or in stages. As severance packages may have tax consequences, you should consult with your tax advisor before making any decisions.
Here's another suggestion: Don't rush to collect the money from your 401(k), 403(b) or 457(b) plan. Of course, if your retirement plan is your main source of savings, you may have no choice in the matter. But once you cash out your plan, you'll no longer benefit from tax-deferred earnings growth. Furthermore, your former employer must withhold 20 percent from your distribution.If you don't cash out your plan, what should you do with it? You might be able to leave the money in your former employer's plan. When you get your next job, you could move the money from your old plan into a new employer's plan, if the new plan allows such transfers. However, you can get much more flexibility by rolling over your retirement assets into an IRA, which provides an almost unlimited array of investment choices. By making a direct rollover to an IRA, you'll avoid the 20 percent withholding and current income taxes on your retirement plan distribution, and you'll give your earnings the potential to keep growing on a tax-deferred basis. Keep in mind, though, that before you reach 59-1/2, your IRA withdrawals will be subject to ordinary income tax and a 10 percent penalty, unless you take systematic distributions under Section 72(t) of the Internal Revenue Code. To make sure you're making the right moves, consult with your tax and financial advisors before tapping into your IRA. After deciding what to do with your 401(k) or other retirement plan, you might also want to adjust the other, non-IRA investments in your portfolio. While you were working full time, you may have established an investment mix that was based on a variety of factors, including your goals, time horizon, risk tolerance, ability to invest and your need for growth and income. But if you are between jobs for an extended time period, you may need to adjust your portfolio. A financial advisor can help you select an appropriate investment mix. Once you're employed again, you can readjust your portfolio as needed. A layoff can be difficult for you and your family. But by thinking carefully about what to do with your retirement plan and your investment portfolio, you can survive this setback - and stay on track toward the future you've envisioned.
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