In today’s world, losing a job can happen to almost anyone — and at times with little notice. Similarly, new opportunities can knock when you least expect them. Consequently, it’s important to be mentally and financially prepared for whatever the job market brings.
Having two strategies in place can help smooth these transitions. First, set up an emergency fund, so if you do lose your job, you have a financial cushion while you look for new work. And second, know how to protect your retirement funds from taxes and penalties should you lose your job or change employers.
Set up an emergency fund
“Losing a job can be a very tough blow,” said Lisa Johnson, an investment executive with Fifth Third Securities. “That’s why I’m a firm believer that everyone should try to set aside three to six months’ worth of living expenses in a special account.”
This may sound daunting, especially when paychecks don’t stretch far enough in the first place. To ease the pinch, Johnson recommends setting up direct deposits into a separate savings account. “Saving five percent from every paycheck eventually adds up,” she said. “And because you don’t see the money in the first place, you don’t notice it’s gone.”
How to protect your retirement account
Perhaps the most valuable benefit of an emergency fund is that it allows you to avoid tapping into your retirement account if you’re suddenly out of work. “At first glance, some people may consider their retirement account a good source for needed cash. But if you cash it out before age 59 and a half, you may lose a portion to penalties and taxes*,” said Jackson.
When losing a job or changing employers, you have a few options for your retirement account that may help avoid taxes and penalties: You can roll it over to an IRA; you may transfer it to your new employer’s retirement plan, if the plan permits; or you may leave it in your former employer’s plan. Here’s a closer look at these options and what you should keep in mind:
“Roll over your retirement account into a rollover IRA. This option will allow your retirement assets to grow tax deferred while giving you the flexibility and control over how the assets are invested. Investment professionals are available to help you choose the best investment options for your objectives and goals,” Johnson said.
Transfer your retirement account to your new employer. Not all new employers accept rollovers from other retirement plans, so be sure to check with your new employer before taking any action. You also may want to make sure your new employer’s plan offers the investment options that meet your objectives and goals.
Keep your retirement account with your former employer. This is an easy option since nothing needs to be done. However, not all plans allow this option. Also, before deciding whether to keep your account with your former employer or roll it over to your new employer’s plan, it’s important to compare the two plans’ investment options. Also, ask whether there’s a window of opportunity to access your rollover funds in case you want to evaluate other options later on.
For more financial strategies when losing or changing jobs, stop in any Fifth Third Bank banking center or visit our website at www.53.com.
*Withdrawals and other distributions of taxable amounts will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal tax penalty.
Fifth Third Securities does not provide tax advice. Please consult your tax advisor before making any decisions or taking any action based on this information.