(Author’s Note: I originally wrote this article not long after I launched TBPC. However, because of my association with Primerica at that time, I wasn’t able to publish it. Since I have broken ties with Primerica, I can now post it. I hope you find it enlightening and enjoyable. – JL)
You’ve just been laid off from a job you’ve held for over 20 years. This is no seasonal or temporary layoff. This is the big “See ya, wouldn’t wanna be ya!” layoff. You are suddenly a member of The Brown Parachute Club. Now, what do you do?
Like everyone, you have certain financial responsibilities that were being met by your paycheck. Just how are you going to meet those obligations now? If you’re lucky, there will be a Severance Package. And sure, there’s Unemployment Insurance, but that’s only going to pay you a small fraction of what you were earning. Also, Unemployment payments will only begin once your Severance payments run out, so no double-dipping.
Well, this dark, horribly ugly cloud, does have a silver lining. If you have been diligent with your retirement savings and have built a nice little nest egg, that egg can save your bacon. What I am talking about here is raiding your retirement plan to pay off all of your debt. I know this flies in the face of everything you have heard about retirement planning. However, this isn’t retirement planning, it’s financial survival. It’s just an option you may want to consider.
Full disclosure here. I am NOT a Financial Advisor and I do NOT hold a Securities License. That said, I can only tell you what I did. I decided that paying off all our debt would be a great way to get a fresh start and reduce financial stress during the unemployment period.
Now for the bad news. Paying off all of your debt by raiding your 401k may seem like a great idea, until you take Mr. Taxman into consideration. Since the money I wanted to withdraw to pay off our debt had never been taxed, I was in for a cataclysmic shock. The total amount of money I had to withdraw to pay off all of our debt had over 1/3 of it going to pay taxes! Yikes! The government will always get their cut.
After I finished channeling our Founding Fathers, by railing against the injustice of taxes and the tyranny of the crown, I realized it actually could have been a lot worse. When I was researching whether or not to pull the trigger on this major reallocation of my retirement funds, I came across a little known rule. The Rule of 55.
Apparently, the phenomenon we are experiencing, being laid off before retirement, is such a prevalent problem the IRS is giving us a break. They have come up with a rule that allows you to withdraw money from your qualified retirement plan, WITHOUT having to pay the 10% penalty. After the financial kick-in-the-teeth you just received from paying those taxes, this probably seems like small potatoes. However, it will keep you from having to cough up thousands of dollars more to Uncle Sam in penalty fees. Always a good thing.
Now for the second disclaimer of this article. I recommend that you contact your tax specialist to verify whether you qualify for this exception. You have to be 55 years old (or older) in the year that you are laid off from your job. You also qualify if you turn 55 in that year. For more information about this rule, click on this link to view the IRS Topic 558 document.
It is completely up to you whether you choose to employ this debt reduction option. I just know that since we have paid off our debt, there is a great relief and peace of mind that comes with knowing we are debt-free. Our only bills each month now are food, gas, insurance and utilities.
Hopefully, this article has given you something to think about. As you face the uncertainty of early retirement, it’s nice to know you have some options.
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