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Smart moves can pay off after layoff

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POSTED: July 5, 2007 5:02 a.m.
If you get laid off or “downsized,” it’s unquestionably a tough break, and it can be stressful. However, if you make the right investment-related moves, the loss of a job doesn’t necessarily mean you have lost the opportunity to achieve your financial goals.
Above all else, don’t panic when you learn of an impending termination. If you are going to get a severance package, you may not have to take the first offer that comes your way. You might be able to negotiate for more attractive terms. But even if there is no room for negotiation, you need to make sure you get all the information you need, such as whether the severance will be paid at once or in stages. As severance packages may have tax consequences, you should consult with a tax advisor before deciding.
Here’s another suggestion: Don’t rush to collect the money from your 401(k), 403(b) or 457(b) plan. Of course, if your retirement plan is your main source of savings, you may have no choice. But once you cash out, you’ll no longer benefit from tax-deferred growth. Also, your former employer must withhold 20 percent from your distribution.
If you don’t cash out your plan, what should you do with it? You might be able to leave the money in your former employer’s plan. When you get your next job, you could move the money into a new employer’s plan, if the new plan allows such transfers.
However, you can get much more flexibility by rolling over your retirement assets into an IRA, which provides almost unlimited choices. By making a direct IRA rollover, you’ll avoid the 20 percent withholding and current income taxes on your retirement plan distribution, and you’ll give your earnings the potential to keep growing on a tax-deferred basis. Keep in mind, though, that before you reach 59-1/2, your IRA withdrawals will be subject to ordinary income tax and a 10 percent penalty, unless you take systematic distributions under Section 72(t) of the Internal Revenue Code. To make sure you’re making the right moves, consult with your tax and financial advisors before tapping into your IRA.
After deciding what to do with your retirement plan, you might also want to adjust your other, non-IRA investments. While you were working full time, you may have established an investment mix that was based on a variety of factors, including your goals, time horizon, risk tolerance, ability to invest and your need for growth and income. But if you are between jobs for an extended time period, you may need to adjust your portfolio. A financial advisor can help you select an appropriate investment mix. Once you’re employed again, you can readjust your portfolio as needed.

Cardella is an investment advisor with Edward Jones in Hinesville.
 

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