What Happens to Your Retirement Savings if You Lose Your Job?

Losing your job can be emotionally and financially stressful. The most obvious impact is the loss of income, but your retirement savings is another concern.

The good news is you don’t lose your retirement savings if you lose your job. In the meantime, you will also need to find ways to hold yourself over financially while you look for new work.

This article will explain how a job loss affects your retirement savings, then cover a few tips for maintaining financial security between jobs.

How Job Loss Impacts Retirement Savings

Although you can’t contribute to a previous workplace retirement plan, you can roll into an individual retirement account (IRA) anytime to continue managing your assets and access a broader investment selection.

Alternatively, you can complete a 401k rollover into a new workplace plan after finding a new job. This may limit your investment choices, but it minimizes the number of accounts to manage.

Your old account administrator must sell your investments to perform the rollover. You could potentially miss growth opportunities — especially if sold in a down market — so consider reinvesting your assets ASAP.

Once you land a new job, use a retirement calculator to see if your unemployment knocked you off track and adjust course accordingly.

How to Maintain Financial Security Between Jobs

Here are some ways to maintain financial security while you look for new work:

1. Have an Emergency Savings Fund

If you have an emergency fund with three to six months of living expenses set aside, these savings can help you cover expenses, avoid debt, and minimize early retirement withdrawals if you lose your job.

If you don’t have emergency savings, be sure to create one when you gain employment again. Save in a high-yield savings account. This could reduce inflation’s impact on your fund.

2. File for Unemployment

After losing your job, file for unemployment benefits immediately. These benefits can replace some lost income while you look for work.

Each state may have a different process and requirements for applying and qualifying for unemployment benefits. That said, most states require you to look for work regularly and submit some details to the state’s unemployment office regarding your job search.

3. Evaluate Your Insurance Options

COBRA is a good way to temporarily maintain affordable health insurance coverage. This program lets you keep your former employer’s health plan and avoid shopping for new coverage. However, you may have to pay higher premiums.

If your spouse is employed, see if you can stay covered under their plan. This may be the most cost-effective option since they may get group insurance rates.

Review other insurance policies, like life and disability insurance. Ensure you can afford premiums and look at each policy’s terms and conditions to determine if adjustments are necessary.

4. Tap into Retirement Funds

If you are unemployed for an extended period or do not have savings to cover your unemployment, tapping into retirement funds early may be better than accumulating high-interest credit card debt.

However, early retirement withdrawals can cause you to incur tax liabilities. For instance, withdrawing early from your 401k or traditional IRA can cause you to incur ordinary income tax and a 10% penalty.

Meanwhile, Roth IRAs may let you withdraw contributions tax-free. However, withdrawing any gains may subject you to a 10% penalty.

The Bottom Line

Losing your job can feel like a setback, but fortunately, you won’t lose your existing retirement assets. When you find work, you can roll old 401ks into IRAs or a new workplace plan.

While employed, save for emergencies ASAP. If you lose your job, file for unemployment — the benefits alongside emergency savings could replace most of your income.

Following these steps can make any temporary unemployment a little less stressful. That way, you can bring your best to every job interview and land work faster.