Category

401k Plans

How a Furlough (or Layoff) Affects Your Finances…and Retirement

By | 401k Plans, Financial Planning

Here are six things you need to know if you or a family member has been furloughed—or laid off—from their job

 

A furlough is an unpaid leave of absence. You don’t report to work, you don’t get paid, and you may lose some of your benefits. Getting fired or laid off is different because it is permanent; whereas, being furloughed means your employer wants you back as soon as things get back to normal, typically at the same position and income level as before the furlough. Here are six things you should know:

 

  1. Filing for unemployment

Whether furloughed or laid off, you should file for unemployment as soon as possible because the CARES Act adds to the amount your state provides weekly, but only through July 31. For instance, the average benefit among the 50 states is $215 per week—the CARES Act adds an additional $600 per week through the end of July. Self-employed, independent contractors and gig economy workers, who typically are not allowed to file for unemployment, can also apply. Learn more here.

  1. Healthcare insurance

If you are furloughed, you may still be able to keep your healthcare insurance. Be sure to check with your employer about how to arrange to pay your contribution amount, if any. If you are laid off, you can continue benefits through COBRA, or you may find a cheaper option through the exchange http://healthcare.gov website—if your state has chosen to open up enrollment due to the pandemic.

  1. Bills and debts

There is a provision for mortgage forbearance if you have a single-family residence mortgage loan backed by the federal government, and renters can avoid eviction for more than 120 days if their landlord has a government loan on the property rented. Learn more here. Student loans held by the federal government will not require payment and will not accrue interest through September 30.

In any case, it is recommended that you call creditors to discuss your situation. Ask them what they have to offer people who are experiencing a temporary reduction in income, and take notes and ask about any fees, additional interest, and whether they report any postponed payments to credit bureaus.

  1. 401(k) or similar retirement plan – contributions

If you are furloughed, your 401(k) accounts should remain in place, but your contributions and matching contributions won’t happen during the furlough unless your employer chooses to make a discretionary contribution. If you are not yet fully vested, there is a scenario that could happen if you are furloughed for an extended amount of time or ultimately laid off. If an employer terminates 20% or more of its workforce, a “partial plan termination” could be triggered, in which case the IRS could decide that all affected employees would become 100% vested.

If you are let go, you can leave your money in the company’s 401(k) plan if you have more than $5,000 in it, although you can’t add additional money to the account. If you have $5,000 or less, your employer has the option of removing you and distributing the funds, so be sure to ask what they intend to do. See some of your other options below.

  1. 401(k) – loans

If you are furloughed, or laid off but leaving your 401(k) with the company, you may be able to take a loan or withdrawal from your 401(k) due to the coronavirus outbreak, depending upon your company plan rules—be sure to check with your plan administrator.

If so, the CARES Act allows up to $100,000 to be taken without penalty, although you will have to either repay the money or pay taxes on the amount withdrawn over the next three years. NOTE: You can do this even if you are under the age of 59-1/2, there will be no 10% penalty, and there will be no mandated 20% withheld by the 401(k) administrator for taxes. In order to meet the eligibility provisions of the CARES Act, you, your spouse or dependent/s must have contracted COVID-19, or must have experienced adverse financial consequences as a result of quarantine, furlough, lack of childcare or closed or reduced hours of business.

If you already have an outstanding 401(k) loan, your repayments will stop while you are furloughed, since those are typically held out from your paycheck. Ask your employer about how you can make repayments or get the loan repayments suspended temporarily.

Taking 401(k) loans or cashing out should be a last option for most people since it can jeopardize your retirement nest egg and your future. After the 2008 financial crisis, most people who stayed in the market experienced financial recovery from their losses.

  1. 401(k) – rollovers

If you are laid off, you do have the option of rolling over your 401(k) money into your own self-directed IRA account. This offers many options, since an IRA can be a mutual fund, annuity, ETF, CD or almost any other type of financial instrument.

You need to choose between a tax-deferred traditional IRA, or pay taxes on the money you roll over and start a Roth IRA. With a traditional IRA, you will have to begin withdrawing a certain amount out every year starting at age 72 and pay ordinary income taxes on the money withdrawn. (These are called Required Minimum Distributions (RMDs)—which are not due in 2020 per the CARES Act.)

With a Roth IRA, you pay taxes up front. You don’t have to withdraw money during retirement, but if you do, it is usually tax- and penalty-free after you’ve owned the account for five years. Your kids can inherit the money tax-free as well.

It’s usually best to work with a financial advisor who can outline some of the tax ramifications, rules and timing requirements so you don’t miss any rollover deadlines or get hit with any penalties or taxes you weren’t expecting. They can fill you in on other options, such as, if you are age 59-1/2 and still working, you may be able to do an “in-service rollover” with part of your 401(k), moving that portion into your own IRA, potentially helping you avoid market risk as you get closer to retirement.

 

If you have any questions, please call us. You can reach Drew Capital Group in Florida by calling (813) 820-0069.

 

This article is provided for informational purposes only, and is not intended to provide any financial, legal or tax advice. Before making any financial decisions, you are strongly advised to consult with proper legal or tax professionals to determine any tax or other potential consequences you might encounter related to your specific situation.

 

Sources:

https://www.fool.com/investing/2020/04/23/how-a-furlough-affects-your-401k.aspx

https://www.immediateannuities.com/roll-over-ira-or-401k/

https://www.washingtonpost.com/business/2020/04/03/unemployed-coronavirus-faq/?arc404=true

https://www.cbsnews.com/news/furlough-versus-layoff-unemployment-aid-coronavirus/

https://money.usnews.com/money/retirement/401ks/articles/what-to-do-with-your-401-k-if-you-get-laid-off

https://www.businessinsider.com/what-you-need-from-your-job-get-laid-off-furloughed-2020-4#if-you-have-no-other-choice-but-to-withdraw-from-your-retirement-funds-know-the-new-cares-act-updates-8

https://www.thestreet.com/how-to/how-to-roll-your-401k-into-an-ira-while-you-re-still-working-14379206

https://www.investopedia.com/articles/personal-finance/092214/guide-401k-and-ira-rollovers.asp

 

401k Rules

The Rules Are Changing For 401(k)s In 2020

By | 401k Plans, Retirement

The Rules Are Changing For Your 401(k) In 2020

If you’re still working and contributing to a 401(k) or similar workplace retirement plan, there is some good news for the upcoming year.

If you’re under age 50, the amount you can contribute to your 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is now $19,500 for 2020—a $500 increase over 2019. Additionally, for those who are age 50 or over by December 31, 2020, the catch-up amount is now $6,500, up by $500 (and the first increase since 2015).

Keep in mind that you can still put away an additional $6,000 in an IRA—$7,000 for those age 50 or older. As always, these contributions can be made up until tax day, April 15, for the previous year’s taxes. That plus the new limits mean that an employee who is 50+ can sock away a total of $33,000 in tax-advantaged retirement accounts for 2020.

For Business Owners

For self-employed small business owners, the amount that can be saved in a SEP IRA or a solo 401(k) goes up from $56,000 to $57,000 in 2020, if all requirements are met. The limit on SIMPLE retirement accounts goes up from $13,000 to $13,500 in 2020 (plus $3,000 if you’re 50+). For defined benefit plans—similar to pensions of the past, but now used by high-earning self-employed individuals—the limit on the annual benefit goes up from $225,000 in 2019 to $230,000 in 2020.

Hardship Withdrawal Rule Changes

Even though making hardship withdrawals from 401(k) and 403(b) retirement plans will be easier for plan participants in 2020, for most employees, withdrawals should be a last-ditch option if you’re facing financial hardship. This is true especially if you’re under age 59-1/2, when you have to pay taxes plus a 10% tax penalty on the amount withdrawn.

However, it will be easier to start to saving again following a hardship withdrawal. Prior to 2020, employees who took a hardship withdrawal were barred from making new contributions to their plans for six months. Starting January 1st, this is no longer the case.

Also in 2020, employees can withdraw earnings, profit-sharing and stock bonuses rather than just their contribution amounts for 401(k) hardship withdrawals. (NOTE: 403(b) plan participants are still limited to just their contributions.)

Starting in 2020, your employer gets to decide whether you have to take a plan loan first—requiring payback with interest—before taking a hardship withdrawal; it’s no longer mandated by the government, it’s optional. Remember, taking a loan rather than a hardship withdrawal is almost always your best choice to keep your retirement on track.

Hardship Verification and Disaster Relief Rules

Hardship verification standards have been eased; an employer or retirement plan administrator is not required to determine if a hardship withdrawal is necessary by checking cash or assets available—the burden is on the employee to certify that it is.

To take a hardship withdrawal, employees must have an immediate and heavy financial burden or need that includes one or more of the following:

  1. Purchase of a primary residence.
  2. Expenses to repair damage or to make improvements to a primary residence.
  3. Preventing eviction or foreclosure from a primary residence.
  4. Post-secondary education expenses for the upcoming 12 months for participants, spouses and children.
  5. Funeral expenses.
  6. Medical expenses not covered by insurance.

In 2020, a seventh category has been added for expenses resulting from a federally declared disaster in an area designated by FEMA; the agency will no longer need to issue special disaster-relief announcements to permit hardship withdrawals to those affected.

 

If you have any questions about the new rules for 401(k)s and similar retirement savings plans, please call us! Our mission is to help you achieve your personal financial and retirement goals.

Contact Drew Capital Group in Florida at (813) 820-0069.

 

 

Sources:

https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#662aa23733bb

https://www.shrm.org/resourcesandtools/tools-and-samples/exreq/pages/details.aspx?erid=1312

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-final-rule-eases-401k-hardship-withdrawals.aspx