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If you are laid off or downsized, it is
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 does not
necessarily mean you have lost the
opportunity to achieve your important
financial goals.
Above all else, do not 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 is another suggestion:
Do not 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 will no longer
benefit from tax-deferred earnings
growth. Furthermore, your former
employer must withhold 20 percent from
your distribution.
If you do not 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 avoid the 20
percent withholding and current income
taxes on your retirement plan
distribution, and you 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
are 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 envision.
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