How to Keep Your Nest Egg Intact After a Layoff

Avoid these taxes and penalties that shrink your savings.

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[See 10 Ways Baby Boomers Will Reinvent Retirement.]

Think before you cash out. Almost half of laid-off workers who left their job in 2008 cashed out their 401(k), according to a Hewitt Associates study of 401(k) participants who terminated employment. But early withdrawals come with a significant cost. A worker with a $5,000 401(k) balance in the 20 percent tax bracket would receive just $3,500 after taxes and penalties. "If there is any way you can avoid touching that money, I would avoid it," says Loeper. If you need to spend some of your retirement stash on necessities, at least try to avoid the 10 percent early withdrawal penalty. Both 401(k)s and IRAs can be used to pay for unreimbursed medical expenses that exceed 7.5 percent of your income without penalty. Other Uncle Sam sanctioned ways to spend an IRA, but not 401(k), balance without incurring an early withdrawal penalty include health insurance premiums after 12 consecutive weeks of unemployment, college costs, and first home expenses up to $10,000. Income tax, however, is still due on retirement account withdrawals, even when used for emergency expenses.