Don’t Let Job Loss Derail Your Retirement

How to keep your retirement savings intact after a layoff.

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A job loss can make life difficult. But it doesn't have to ruin your chances of a comfortable retirement. The best way to avoid a loss in retirement savings is to find another job quickly. These days that's easier said than done though, right? So while you are looking for a new job, here are some tips for keeping your retirement goals on track.

[See America's Best Affordable Places to Retire.]

Open an IRA. If you don't have one already, use this opportunity to open up an IRA. A traditional IRA, which you are allowed to take a tax deduction for, is an excellent account to use to continue the saving you were doing with your 401(k). If you want a little more flexibility, consider a Roth IRA, which uses after-tax contributions. Both types are limited to $5,000 in annual contributions for 2010, which increases to $6,000 for those age 50 and over. If the volatile stock market makes you nervous, consider investing in a Roth IRA CD, bond fund, or money market mutual fund within your IRA.

Create a second source of income. If you lost your job involuntarily, hopefully you'll be eligible for unemployment benefits. Try to get a part time job to help cover some of your expenses while looking for a new job. Deliver pizzas. Just a small amount of income will make you less likely to raid your retirement account.

[See How to Invest for Retirement Without a 401(k).]

Set up automatic contributions. Without a job you no longer have a human resources department helping to manage your retirement contributions. You're going to have to take control. Take an hour out of your day and create an automatic transfer of funds from your checking or savings account into your new IRA. If you don't have much income coming in yet, start small. It's important to make it automatic to ensure you get it done.

Avoid early withdrawals. Do everything in your power not to dip into your retirement savings to support yourself during this time. Slash your expenses. Take a part-time job to make extra money. The early withdrawal penalty, normally 10 percent, and income taxes, up to 35 percent, are typically enough to make this a really bad move.

[See 5 Retirement Moves for New Graduates.]

Consider a rollover. With the loss of a job comes the loss of one of the main benefits to using a 401(k): the matching contribution. Without the match, the 401(k) becomes just another retirement account with limited choice and sometimes expensive funds. Consider transferring your 401(k) funds to a rollover IRA. Avoid taking the cash distribution from your old company. If your former employer sends you a check, don't cash it. Take it to a low-cost mutual fund company to help you set up an IRA.

Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.