Considerations When Facing a Layoff

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There are multiple considerations if you're faced with a layoff or furlough. Understanding how to transition your company retirement plan is a common question, and whether you should leave the money in a 401(k) or move the funds into an individual retirement account (IRA).

Financial advisors at BECU Investment Services can also provide guidance to your unique situation to help you navigate uncertain times.

Frequently Asked Questions

1. Should I leave the money in my previous employer's 401(k)/VIP plan, or move it into an Individual Retirement Account?
2. Should I consider withdrawing money from my 401(k) or VIP plan?
3. If I'm going to be laid off, should I reduce or stop making contributions now?

Should I leave the money in my previous employer's 401(k)/VIP plan, or move it into an Individual Retirement Account (IRA)?

Typically, you have several options to choose from with your employer's retirement plan, each of which should be carefully considered before making a decision. Because every plan is unique, it's best to consult with a financial advisor who can advise you on the pros and cons of each option, and provide guidance on the best approach based on your specific circumstances.

Should I consider withdrawing money from my 401(k) or VIP plan?

If you're considering withdrawing money from a 401(k) plan, check with the plan administrator first to verify this option is available to you. As a general rule of thumb, dipping into retirement savings should always be a last resort: Loans against your 401(k)/VIP could be detrimental to your retirement plans and should be seriously considered.

Withdrawing before age 59 ½ triggers a 10% penalty, plus applicable income taxes. There is what is known as the “rule of 55.” If you turn 55 (or older) during the calendar year and lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you still must pay taxes on your withdrawals.¹ Keep in mind, the rule of 55 also applies to other qualified retirement plans, such as a 403(b). A financial professional can help you learn more about how the rule of 55 may help you with your financial goals.

There are other exceptions to the penalty. Some of these include:

Individuals who have a hardship

Someone who can show financial hardship may be permitted to withdraw funds from their 401(k).²

First-time home buyers

You can potentially withdraw up to $10,000 for a first-time home purchase without being subject to a penalty.³

Disability or death

If you become permanently disabled, you can withdraw funds without penalty.⁴ If a 401(k) owner passes away, non-spouse beneficiaries are typically subject to a 10-year distribution rule where they are required to withdraw the entire balance within a 10-years of the owner's death, otherwise beneficiaries may be subject to a penalty. There are exceptions to this rule such as surviving spouses, those suffering from a chronic illness, or minor children.⁵

Victims of a domestic abuse

Under SECURE 2.0, qualified plans may allow participants who self-certify that they are victims of domestic abuse by a domestic partner or spouse within the past year to withdraw up to the lesser of $10,000 or 50% of the participant's 401(k) account.⁶

Emergency Withdrawal

With the signing of the SECURE 2.0 on Jan. 1, 2024, you can withdraw up to $1,000 per year for unspecified or family emergency expenses, penalty-free, if permitted by your plan.⁷

Plan termination / bankruptcy

Distributions may be allowed if your 401(k) plan is terminated and not replaced by a new one, or if you happen to go bankrupt.⁸

Divorce

In certain circumstances, during a divorce, particularly if a court orders the assets to be split, you could be able to access 401(k) funds without having a penalty.⁹

Qualified public safety employees

For certain qualified public safety employees such as members of law enforcement, firefighters, etc., who are 50 or older, provisions exist that may allow early withdrawals from some government plans.¹⁰

If I'm going to be laid off, should I reduce or stop making contributions now?

For some workers, particularly federal workers, the news has been concerning with talks of significant layoffs on the horizon.¹¹ There have also been reports that the US is potentially headed for a recession, which could possibly impact some industries.¹² If you're concerned about being laid off and don't have emergency savings set aside, it's important to build those funds up first. If you can't build both emergency savings and contribute to a 401(k)/VIP, then consider diverting some of your contributions to an emergency savings account, but try to contribute at least enough to your 401(k)/VIP to meet your employer's match amount.

Need More Help? Talk With a Financial Advisor

Financial advisors at BECU Investment Services have in-depth experience working with credit union members facing a job loss. We can help you determine your next steps and are ready to help. We can:

• Review your 401(k)/VIP options
• Provide the pros and cons of your pension plan options
• Develop an appropriate retirement investment strategy based on your current situation
• Determine your next steps to help you maintain your financial independence
• Provide a complimentary review – as a member of the credit union you are entitled to talk with one of our financial advisors; it's always a good idea to get a second opinion when your future is at stake.

Contact us to set up a meeting with a BECU Investment Services financial advisor, email investmentservices@becu.org, or call 206-439-5720. The appointment is complimentary, and can be done remotely (via phone or web). Even if you just want a second opinion, we are here to help and provide answers in this time of uncertainty.

Click here to see our list of upcoming complimentary webinars presented by BECU Investment Services.

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Sources:

¹Rule of 55 and Early 401(k) Withdrawals | Charles Schwab

²Hardships, early withdrawals and loans | Internal Revenue Service

³Retirement topics - Exceptions to tax on early distributions | Internal Revenue Service

⁴Retirement topics - Disability | Internal Revenue Service

⁵Retirement plan and IRA required minimum distributions FAQs | Internal Revenue Service

⁶SECURE 2.0 developments and guidance for 2024

⁷New 401(k) Rules Let You Withdraw $1,000 Without Penalty

⁸401(k) withdrawal rules: How to avoid penalties | Empower

⁹Divorce and 401(k): What You Need to Know

¹⁰Retirement topics - Exceptions to tax on early distributions | Internal Revenue Service

¹¹New wave of layoffs for federal employees is coming. What we know.

¹²10 Careers In Which You Are At Most Risk Of Losing Your Job

This article was prepared by LPL Marketing Solutions and BECU

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