If you lose your job, you will likely still want to keep up with your retirement savings in order to secure your future. While you cannot add to a 401(k) once you've left the job, this doesn't mean that you are out of options. If you have savings or leftover money from your unemployment checks, you can still invest it.
Consider an IRA Rollover
Since you can't add money to your 401(k) as it is, the smart thing to do is roll it over into an individual retirement account (IRA), which may allow you to make contributions. This process simply requires opening an IRA and transferring the money directly to the new account. Another option is to let the 401(k) sit where it is, transferring it to a new 401(k) when you get a new job that offers one.
Understand Requirements for IRA Contribution
If you're single, you cannot contribute to an IRA unless you have earned income. Unemployment or disability payments do not count as earned income, even though they are taxable. However, if you are doing some freelance work on the side while looking for regular employment, you can contribute this money to your IRA. If your spouse is working, you should contribute up to $6,000 or $7,000 if you have attained the age of 50 as long as your spouse earns more than that.
Consider Your Emergency Funds
The disadvantage with retirement savings is that there are often penalties for withdrawing the money early. When you don't have a steady source of income due to lack of employment, you are in a precarious financial situation. Rather than worrying about your retirement savings, it's smart to save up six months to a year's worth of expenses that you keep in an account that's readily available. Only look to the distant future if you already have an emergency fund.
Investing While Unemployed
If you have an emergency fund saved up, but still have extra money and are either ineligible for IRA contributions or have fully funded your IRA, you can still invest your money. However, not in accounts that have the same tax-protected status as retirement accounts. Consider investing in certificates of deposit (CDs), which you can purchase from your local bank, or open an account with a brokerage firm to purchase stocks, bonds or mutual funds.
Make the Decision Based on the Situation
The decision on whether to continue contributing to your 401(k) should be determined by your current financial situation. If you have some money that you had set aside that you anticipate you’re not going to need in the near future, you can continue contributing to your 401(k). On the other hand, if you’re not in a good position financially, the best option would be to stop making contributions.
What Are the Legal Options?
You can contribute to a 401(k) at whatever time regardless of whether or not you’re employed. The account can be managed by your previous employer as long as it has a minimum balance of $5,000. You can also opt to rollover the account to a qualified person instead of leaving it to your former employer.
Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.