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Plan Well, Retire Well

Saving and investing your money

Leaving Your Current Employer? What Should You Do With Your Windfall?

I remember when I was 24, and in the midst of changing jobs. My former employer sent me a check. It was a little under $1000.00. I was excited; I deposited the check right away. Needless to say, I spent the money on some "urgent" need at the time. This happened once or twice more throughout the earlier part of my (and my spouse's) career. Although I knew I could have rolled the money over into an IRA, I chose to spend it instead. Had we made the decision to save the money rather than spend it, who knows how much it would be worth today? Sadly, we are not alone. Now, I am trying to make up the difference by contributing to my 403(B), 457, Roth IRA, and state pension plans.

Today, more than ever, it is important to plan for now and later. Studies suggest that less than half of Americans are saving for retirement. Of those that are saving, if a layoff happens, their retirement savings might be in jeopardy. For those of you that may have been downsized, your 401(k) statement probably looks very tempting right now. However, before you make the decision to spend it, evaluate what you will have left to depend upon during your retirement years.

Aside from not having enough income during retirement, there are tax consequences to taking early withdrawals as well. When you request that your retirement holdings be mailed to you, your company is required to withhold 20% of your gross distribution for the IRS. To avoid this, you can request a direct rollover into another qualified plan (see Rollover Chart below). If you decide to receive the distriubtion in your name, at tax time the taxable distribution amount will be included in your taxable income. If you are under age 59 1/2, you will be assessed an additional 10% tax penalty. The 20% withheld by your employer will help to cushion these taxes. However, depending on your particular tax situation, the 20% may not be enough to prevent you from owing additional taxes. There are certain exceptions that cause the IRS to waive the 10% tax penalty. These include: up to $10,000 for first-time home buyer, higher education expenses, or deductible medical expenses, to name a few. For a complete list, visit the IRS website.

The best time to prepare for an impending layoff, retirement, or any life changing event is before it happens. So, if you haven't thought about what needs to be done, here are things you can do now to hedge against unnecessarily tapping into your retirement funds early:

1. Establish an emergency fund – usually six months of your monthly expenses

2. Pay down your debt – debt, especially high interest debt, is the single largest barrier to financial security

3. Track your expenses – sometimes we can find "extra" money when we are aware of our spending

4. Develop a spending plan – this provides a clear picture of how you want your money allocated (budgeted).

5. Use credit wisely – although the goal is to lower/eliminate debt, if necessary, use a low interest credit card / line of credit for emergencies if an emergency fund is not adequate.

6. Contribute to your retirement plan – start/continue to contribute to employer/personal retirement accounts; if your employer offers matching contributions, make sure you contribute enough to get the full matching contribution.

If you are thinking about rolling over your retirement money, view the Rollover Chart to determine where your retirement proceeds can be invested. For more information on retirement plan investing, see our news releases Investments for Retirement Beyond Company Retirement Plans and Will Your Investments Move You into Retirement?

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