For optimal viewing experience, please use a supported browser such as Chrome or Edge

Download Edge Download Chrome

Strategies for managing retirement assets in the event of a layoff

Published on June 18, 2020 | LPL Financial

Layoffs are a fact of corporate life as companies grapple with economic cycles and global competition. If you get caught in a corporate downsizing and you are not immediately moving to a new employer, you generally have three options for your retirement plan assets:

  1. Leave your money in the existing plan.
  2. Take a cash or “lump sum” distribution.
  3. Transfer the money to another qualified retirement account, such as an individual retirement account (IRA).1

Consider the merits of each option.

Option #1: Stay Put

You may be able to leave your savings in your existing plan.2 By doing so, you can potentially continue to enjoy tax-deferred or tax-free compounding and receive regular account statements and performance reports. Although you will no longer be allowed to contribute to the plan, you will still have control over how your money is invested among the plan’s investment selections.

Option #2: Cash Out

You may elect to have your money paid to you in one lump sum. A lump-sum approach has a number of drawbacks, including 20% withholding on the pre-tax contributions and the earnings portion of the eligible rollover distribution (to help cover your ordinary income tax liability) and possibly a 10% additional tax on early withdrawals if you take the distribution before age 59_. Depending on your state of residence, you may be liable for additional taxes.

Option #3: Roll Over

You can move your retirement plan money into another qualified account, such as an IRA, using a “direct rollover” or an “indirect rollover.” Generally, traditional plan balances can only be rolled into traditional IRAs and designated Roth account balances can only be rolled into Roth IRAs. With a direct rollover, the money goes straight from your former employer’s retirement plan to your IRA without you ever touching it.

The advantages of a direct rollover include simplicity and continued tax deferral on the full amount of your plan contributions and any earnings. IRAs may also afford more investment choices than the employer-sponsored plan.

Generally, in an indirect rollover, you take a cash distribution, less 20% withholding, but must redeposit your qualified plan assets into an IRA or another plan within 60 days of withdrawal to avoid paying taxes and penalties. With this approach, however, you’d have to make up the 20% withholding out of your own pocket when you invest the money in the new IRA or plan, or else the withheld amount would be considered a distribution, so ordinary income tax and possibly the 10% additional tax would apply.

Consider Other Short-Term Funding Sources

During times of economic hardship, it may be tempting to take money intended for future needs and use it to supplement a temporary income shortfall. But remember that any funds you take out today will reduce your current retirement savings.

Before choosing a cash distribution from a retirement plan, consider other potential sources to meet your current income needs. For example, savings accounts and money market accounts are easily liquidated. With short-term interest rates at historically low levels, the opportunity cost for using these funds is relatively low.

Source/Disclaimer:

1Once you are eligible for a new employer’s plan, you might also have the option of rolling your assets to this plan.

2In general, if all requirements are met, the plan administrator of your former employer may effect an automatic rollover of retirement assets exceeding $1,000 but less than $5,000 into an IRA in your name.

Required Attribution

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Tracking #1-768641

Related Resources

Webster InvestmentsArticles
Beat Inflation with Your Back-to-School Budget
Back-to-school season is always a busy time, but in 2025, it comes with a bigger-than-normal price tag. Between inflation, tariffs, and general economic uncertainty, everything from pencils to laptops may cost more this year. According to Business Insider1, inflation is projected to rise to around 5% by mid-2025. For many families, that means tighter budgets […]
Webster InvestmentsArticles
A Financial Planning Guide for Families with Disabilities
About 61 million adults in the U.S. live with a disability. Many of these disabilities are serious enough to impact a person’s daily life.1 There may be financial benefits available to those whose disabilities leave them unable to hold down a job. However, these benefits may come with strict rules and regulations, such as limits […]
Webster InvestmentsArticles
Tips for the Fast Growing Sandwich Generation
Finances are dicey for those simultaneously caring for their parents and kids Over the last 20 years, the median-age for Americans (the median age is the point where exactly half the population is older and the other half is younger) has increased by about 3 ½ years. Today, the median age is 38.8 years. But […]

Connect With Us

Learn more about Webster products, services and the communities we serve.