Dealing with Retirement Plan During Recession

Recession will always signal massive job loss in any industry. As a member of the workforce, you could be easily terminated if your company does not have the capability in handling the challenges of recession.

There are too many external factors that will affect any company which will eventually force them to terminate certain employees or even close down. The worst thing about recession in relation to job loss is that the announcement of massive job cuts could happen in a matter of weeks or even days.

As soon as you are terminated, one of the first thing you need to take care of is your retirement benefits or 401(k). Your 401(k) is an expendable retirement plan but could reap great benefits if you just wait enough to cash them out when you reach retirement age.  Your 401(k) should be considered as your lifeline. But this type of lifeline should not be used hastily as this should only be considered when everything else is gone.

Cashing out 401(k) is very easy but it will cost you considerably. 401(k) is designed to be cashed out after you reach the retirement age or at least 55 years old. If you are not at this age yet, do not haste yourself to cash out your 401(k).

There are stiff penalties attached to this type of savings plan if you are not within retirement age. Expect at least 20% in early cash out penalty and additional taxes that you have to pay if you want to cash them out. Because of the taxes and penalties, you might end up with only 60% of your savings or even less. The taxes and penalties will only be waived if you are already within the retirement age.

Options Other than 401(k)

There are still other sources of funds that you can consider. Your 401(k) does not have to be depleted for now since your future will be a lot more difficult without any funds.

• Savings Account – This is where your years or just months of savings will come into play. Instead of spending unnecessary money in taxes to cash out your 401(k), your savings account will require 0% tax if you want to cash them out.

• Expanding Your Loan – Another source of temporary fund is to expand your loan. This might be a little bit risky in terms of additional interest rate. But the mere fact that you are given a chance to expand your loan and use them temporarily until you find a job should be a good thing.

Options for Roth IRA

If, for some reason you have Roth IRA instead of 401(k), you can actually cash out some amount as a temporary source of income. The big difference between Roth and 401(k) is based on the penalties incurred for early cash out. Roth IRA incurs fewer penalties compared to 401(k) wherein the penalties will never reach 20%.

But there is a small catch. The fact that you will be given few penalties in Roth is based on the amount you could cash out. Instead of taking out the whole thing, you will only be required to cash out your accumulated contribution. It could be a small amount especially if you are just starting out with Roth but it could also be good enough to get you through these tough times.

Your 401(k) should be considered as your ticket for the future and should never be jeopardized. There are options aside from cashing out your 401(k) which should be more than enough to help you go through these tough months of recession. Getting terminated should not make you panic because the help is available for those who seek.