By coinnews 
00:00 Speaker A
Well, this week on wealth, we’re helping you budget for burnout, walking you through the financial impact if you quit your job or are unexpectedly laid off. Today, we’re focusing on the impact to your retirement savings. Joining me now is Christine Benz. She’s Morningstar Director of Personal Finance and Retirement Planning. So Christine, you say the first rule during a job loss is, quote, do no harm. Why is protecting cash reserves more important than contributing to those retirement savings?
00:36 Christine Benz
Well, Ally, thanks for having me on, and I do think that’s an important point when people have job loss or they separate from their jobs. Inevitably, the household budget becomes a little tighter, and so this can be a really risky time for your total financial plan where you might be more likely to rely on credit cards to get you through, or the pot of money that you’ve saved for your retirement may look tempting as a source of funds. So you want to be super careful, obviously, about credit card debt. No need to go over why that could be a risky thing to avoid. Um, but in terms of invading your portfolio, if you are not yet of retirement age, you’ll pay, um, a penalty of 10%, plus you will pay ordinary income tax if you’ve made pre-tax or traditional, uh, contributions to those accounts. So you want to be super careful about pre- pre- um, preeminently pre- about invading that that 401k plan early.
02:20 Speaker A
And I thought this was a really interesting opportunity that you mentioned, using a a period of unemployment as a time to consider a Roth conversion. So for folks who are unfamiliar with that, what exactly is a Roth conversion? How does someone go about doing it? And what are the biggest advantages there when it comes to a period of time when your income’s low?
02:55 Christine Benz
Right, so with Roth accounts, um, you can enjoy tax-free withdrawals, and then you aren’t subject to what are called required minimum distributions when you’re in retirement. No one is telling you that you have to get the money out on a predetermined basis. So Roth accounts are really attractive things. You can take traditional tax-deferred accounts, and you can make conversions to Roth. The issue is that you will owe taxes at the time that you do the conversion. So you want to be careful about when you do those conversions. If, for whatever reason, you find yourself in a trough in terms of your income, that can be a really attractive time to make a conversion. The key is that ideally you would hold the taxes due on that conversion apart from the funds in the the 401k or IRA. So you wouldn’t want to have to take money out of the IRA to pay the tax bill. So get some tax advice here, but for people who do have the wherewithal to pay those taxes due on conversions, it’s an attractive thing to investigate.
04:44 Speaker A
What about for someone with some income or a savings cushion? What are the best ways to keep retirement savings on track during a period of unemployment?
05:00 Christine Benz
Well, one would be to consider an IRA contribution. A key hurdle with IRAs is that you have to have earned income. But if you’re part of a married couple and one of you has enough earned income to cover the contributions that you’re making, you can contribute to an IRA in your name. So that is one idea. Um, another idea is if you are covered by a qualifying high-deductible healthcare plan, you can make contributions to a health savings account. Now, that isn’t the same as a retirement savings account, but it is a way to have additional assets that will be available for you in retirement. And finally, I would call out a taxable brokerage account as a really flexible vehicle to potentially look to if you do have some income that you can set aside. There is no earned income requirement there, and you can put as much into that taxable brokerage account as as you want to or as you’re able to. It’s just important to note that you will pay income on any distributions, or you’ll pay tax on any income distributions that are made, and you’ll also pay tax, obviously, on any, um, appreciation. If you sell assets out of that account, you will pay taxes on those gains.
06:51 Speaker A
Hey Christine, thank you so much. Appreciate your time.
07:00 Christine Benz
Thank you so much.