Unemployed? What to do about your 401k?

Unemployment. It happens to most workers at least once. For many it will happen several times. Blame it on the new, more flexible, more competitive world economy.

After the initial shock, it is natural for most people to start considering their income options. For most people there is unemployment insurance to cushion the blow and replace some of the lost income for a while. Emergency savings and debt can also help maintain one's lifestyle for some time. As the search for a new job drags on, however, many people will start to eye their 401k savings. Surely the government will make an exception for the unemployed, right? Surely I can use some of that money to help pay the bills until I find a new job?

The answer is a very cautious maybe. In particular, the government may allow you to withdraw funds to pay for COBRA insurance benefits. Be aware that you will owe tax on the withdrawals (so set some $ aside for that purpose), but there will be no penalty. PLEASE! CHECK WITH A TAX OR FINANCIAL PLANNING PROFESSIONAL BEFORE REMOVING 1 PENNY FROM YOUR 401K OR IRA ACCOUNT! The IRS does not make hardship exceptions to the tax laws.

Remember, however, that although things may be looking bleak, this unemployment situation is temporary. It most likely took many years to build up your 401k account - and it will take many years to replace the funds should you remove them now. Retirement will come, and that need will be permanent.

A better approach is to drastically cut back on expenses in the short term while "rolling over" your 401k into a personal retirement account. (Careful: this needs to be done properly to avoid taxes and penalties!) Why remove it from the 401k? The primary reasons are to reduce expenses and increase investment opportunities. Most 401k plans have very limited investment choices. In your personal retirement account, choices are virtually unlimited! 401k often have substantial buried expenses to handle government compliance reporting and hefty management costs. Since you are no longer an employee, and you are no longer making contributions, you no longer get the benefits which are paid for by these expenses.

Financial Planners such as Frontier specialize in helping people through financial transitions, including painful ones such as periods of unemployment. Give us a call, we can help explore the options available to you. We will work together to get you through this period without sacrificing your financial future.

Frontier is located in Somerset County in beautiful central New Jersey. We will accept hourly fee based clients as well as traditional asset based management fee arrangements. Regardless of the fee arrangement, we are committed to the highest ethical standards in the industry. Initial consultations are always free of charge.

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