As job losses continue to pile up across the country, here’s some advice from our client Tim Hawkins at The Masters Group…

Job Loss Survival Guide

If you have been subject to a recent downsizing, there are a number of critical items to consider regarding how to best generate income and how to handle your retirement plan. The decisions you face are irrevocable and could be catastrophic from a tax perspective.

Act you age – Generally, if you are under 59 ½ you are subject to a 10% early withdraw penalty which when added to your federal and state tax bill could total 40-50% in taxes on any money you withdraw from your retirement account. There is an exception to this rule if you are 55 or older and have a company retirement plan. Any distributions taken from the plan are not subject to the 10% early withdraw penalty. This doesn’t apply if you are between 55 and 59 ½ and you roll your company plan to an IRA account. If you have already rolled your company plan to an IRA there is an exception to this rule.

Take(ing) stock – Many employees with company stock in their retirement account don’t realize that there may be a substantial tax benefit available. Tax on net unrealized appreciation (NUA) in the company stock could be delayed and receive long term capital gains tax treatment versus the higher ordinary income treatment on a regular distribution. This technique needs to be handled carefully to avoid any unintended tax consequences but it could lead to substantial tax savings. Those under age 55 would be subject to the 10% early withdrawal penalty on this strategy so weigh the costs versus the benefits in that situation.

Be the boss – You may decide you want to start your own small business. An opportunity for you could be to roll your company plan into a Solo 401(k) plan. This is a low cost retirement plan similar to a big company plan. One of the benefits is the potential to borrow money from the plan. There are restrictions on the amount you can borrow but it could help bridge the change in income and get the business rolling.

Exceptions and pitfalls – As mentioned earlier, there is an exception to the 10% early withdrawal penalty. The IRS allows a series of substantially equal periodic payments or 72(t) payments from IRAs for those under 59 ½ to avoid the 10% penalty. These payments, calculated with three different methods using IRS rules, must be made for a minimum of 5 years or until you reach age 59 ½ at which time they could be decreased, increased or stopped. With some proper planning by splitting IRAs or using a particular calculation method, you can create an income stream that fits your current needs but leaves some of the dollars in the tax deferred account for longer term needs. A pitfall to avoid is becoming delinquent on an outstanding 401(k) loan. Usually company retirement plans require loans to be repaid in full within 60 days of leaving. If a loan becomes delinquent, any unpaid amounts will be treated as a taxable distribution for IRA purposes and will be subject to the 10% early withdrawal penalty if the owner is under 59 ½ along with federal and state taxes.

Tim Hawkins is president of The Masters Group. Contact him at 515-964-9671 or email directly.

Posted: July 8, 2009 at 11:21 am by Ryan Hanser