Due to the current global pandemic, numerous businesses have been seriously affected and either had to downsize by laying off employees or even close their doors permanently. This is especially true for organizations that were experiencing significant financial issues prior to the pandemic. Unfortunately, Alcoa’s Intalco Works aluminum smelter near Ferndale in Whatcom County is one of those organizations which will soon be laying off 700 employees when it closes its doors by the end of July 2020.
Multop Financial, in Bellingham WA, understands that Alcoa’s Intalco Works closure will be a serious blow to the local economy, affecting many individuals beyond the 700 employees who will be laid off. Matthew T. Bumstead, the president of Multop Financial, stated that “We are here to help those who have recently lost their jobs by offering information on how to access their 401(k)s and other Alcoa benefits.”
CARES Act: Temporary Relief
The COVID-19 stimulus plan or the Coronavirus Aid, Relief, and Economic Security (CARES Act) allows people to borrow up to $100,000 or 100% of distributions from their 401(k)s and individual retirement accounts (IRAs) without a 10 percent premature penalty in order to get by in these next few months. This applies to all individuals even those younger than 59½ years old.
Repay Or Be Taxed
If you do not repay the money to your retirement plan within three years, the money withdrawn will be considered ordinary income and you will need to pay income tax on it. However, you can take up to three years to pay off the tax.
To qualify for this relief you or your immediate family must be diagnosed with COVID-19 or you must experience economic losses due to being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to a lack of child care.
Should You Take Advantage Of CARES
Financial advisors, however, warn individuals who decide to take advantage of the CARES Act that they need to think of the future as well. If you need the money to support the immediate needs of your family and have no other options then you should withdraw from your retirement plans. However, if you can get by without that money you shouldn’t spend a cent from your retirement plan since you will be giving up tax-deferred compound growth potential. This will likely hurt your retirement income!
Protecting Your Retirement Plan
If you find yourself laid off, unemployed, or have decided to leave your job, you need to know the ins and outs of protecting your retirement savings. As a plan participant leaving your employer, typically you have four options (and may engage in a combination of these options), each choice offering advantages and disadvantages.
You might have heard of a direct rollover which essentially enables you to transfer the money you have invested into your 401(k) into your IRA or a new retirement plan. The IRS will give you 60 days to complete your rollover or transfer without any penalties. Secondly, you can keep your current 401(k) with your former employer. Thirdly, you can rollover your retirement plan assets to your new employer’s plan, if one is available and rollovers are permitted. Finally, you can simply cash out the account value.
Option 1: 401(k) vs. IRA
On the surface, a direct rollover may seem simple but unless you have the assistance of an experienced financial advisor, this could end up costing you money. For example, if you have the opportunity to rollover a 401(k) with a high plan administration, investment and individual service fees and expenses into a fee-free IRA, you could save a significant amount of money. In its publication “A Look at 401(k) Plan Fees” the Department of Labor estimates that a 1% increase in fees could reduce your retirement account balance by 28%.
Rolling over your 401(k) into an IRA may not only save you money, you would be paying for fees and expenses, but it can also provide you with more investment options. This is because 401(k) plans are limited to about a dozen assorted mutual funds whereas IRAs offered by brokerage firms can offer you the opportunity to invest in almost any stock or exchange-traded fund and hundreds of mutual funds.
On the other hand, if you invest your retirement income only in IRAs then you will lose the employer contribution which could be 50% of your contribution (e.g. if you are allowed to invest 6% of your income in a 401(K) then you only have to spend 3% since the other 3% is covered by your employer).
Option 2: Keeping Your Current 401(k)
You also have the option of keeping your money with your former employer if your account balance is more than $5,000. This option could be wise since the market is currently quite volatile and selling any investments right now could mean losing a part of your investment.
However, you also need to keep in mind that if you are not an employee, you won’t be able to make any more contributions. Furthermore, you’ll lose the employer match contribution but you may still have control over how your money is invested among the plan’s investment selections.
Option 3: Rolling Over Your 401(k) Into Your New Employer’s Retirement Plan
Your third option, if you have found new employment, could be to rollover your retirement plan assets to your new employer’s plan. This, of course, will depend on whether your new employer has a retirement plan and if rollovers are permitted.
The main advantage of transferring your existing 401(k) into your new employer’s plan is that it may be simpler to manage your retirement plan and make active decisions if it is all in one place. If your new employer offers a plan with lower overall fees than your previous employer and has better investment options then a rollover could be a good idea.
Unfortunately, sometimes rolling over into your new employer might limit your investment options since you may not be able to do much about how your assets are allocated. What’s more, if your previous employer’s plan offers lower overall fees then it may be more advantageous to keep the money in your current 401(k).
You should also consider keeping your existing 401(k) if the plan offered by your new employer provides you with complementary, investment options. By doing so, you’ll be able to enjoy the benefits of both plans.
Option 4: Cashing Out Your 401(k)
Cashing out your 401(k) under the age of 59 ½ can mean that you may have to pay income taxes on the amount plus a 10 % IRS penalty. In addition, that sum can never be reinvested in a 401(k) like you could do if you borrow money from your 401(k). This means that you will probably lose a part of your retirement capital or savings which may affect your financial objectives for retirement. The fact that earnings in your 401(k) plan grow tax-deferred, the amount taken out now could be much greater at retirement, especially if you are young and are decades away from retirement.
There are, however, some advantages to withdrawing the money in your 401(k). The most obvious benefit is that you’ll be able to cover immediate expenses and pay bills. What’s more, if you have a high consumer debt as a result of unpaid credit card bills, then in order to avoid the high interest rates which could be consuming a considerable part of your income, it may be a good idea to to cash out your retirement.
For more information about managing your retirement plans and other benefits after losing your job, please use our online contact form or call us at (888) 671-7891 today. Our team of advisors will work with you to develop a customized financial plan specific to your personal goals and current needs!
Securities and financial planning offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Multop Financial is not affiliated with LPL Financial, and offers tax and accounting services separate and apart from LPL Financial.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Contact your plan sponsor if you would like more details regarding applicable provisions of your specific retirement plan.