Participants will need to make informed decisions about retirement savings and will need a trusted resource to fill the information gap and help them avoid costly mistakes. Immediate financial pressures can drive decisions with negative long-term consequences.
Here are some tips to share:
Leave Savings in the Plan
New contributions to a 403(b) plan will end once a layoff occurs, but many school districts and organizations will allow participants to keep their retirement savings in the plan. Why leave money in a 403(b) plan? Aside from the possibility of being recalled to work at a future date, teachers over age 55 may have access to the funds without any early withdrawal penalties. Alternatively, if certain requirements have not been met, withdrawals may be subject to charges and surrender penalties. It is important participants fully understand the tax implications of cashing out before making a decision that could cost them dearly.
Roll It Over
Rolling retirement savings into an IRA is a good way to give 403(b) participants more control over their nest egg. Money can be directly transferred from a 403(b) plan to a rollover IRA, avoiding all tax penalties. Participants should check out the many rollover choices available to determine the best option for them.
Participants may also need help wading through the necessary paperwork to transfer their assets to an IRA. The process is time-consuming and may be prove to be a disincentive for some. The traditional process of requesting and completing an IRA rollover could take up to two or three weeks, so encourage patience and perseverance.
Look at the Big Picture
While near-term financial pressures may seem insurmountable, participants should be coached to spend time reviewing their expenses to see where cuts can be made. If they have other savings accounts, those may provide a better first line of defense than their retirement savings. Help them look for ways to make the most of their severance package, and build a financial plan together.
Bottom Line — Don’t Cash Out!
Participants may say, “But I can’t contribute to the savings plan any more and I need the money, so why not cash it out?” Remind them of the current tax consequences and potential tax penalties. And point out that by taking 403(b) plan dollars now, they will lose out on the earnings that will accumulate over time — earnings that are tax- deferred and may be essential to funding a secure retirement and a long life.
With help teachers can avoid temptation today and make decisions they will come to appreciate in the years ahead.
Scott Bartholomaus is executive vice president of 403(b)/457 Sales and Distribution for Symetra Life Insurance Company. Symetra is a long-time provider of retirement plans for teachers and employees of nonprofit organizations.
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