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Employers Could Terminate Your 401(k) Plan Due to COVID-19. What to Do if It Happens.

By Katie Brockman – May 3, 2020 at 2:17PM

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If you lose your 401(k) plan, don't panic.

The coronavirus pandemic has essentially brought the economy to a standstill, causing thousands of businesses to close their doors and resulting in millions of layoffs. The organizations that are fortunate enough to stay open have also faced challenges, many of them experiencing cash flow problems as more Americans are asked to stay home.

As a result of these budget strains, some organizations have opted to slash employee benefits, including 401(k) plans. While some companies have simply suspended employer-matching contributions, others have decided to terminate their plans altogether to save money. Here's what to do if that happens to you.

401k egg on top of twenty dollar bills.

Image source: Getty Images

COVID-19's impact on 401(k) plans

The good news is that relatively few organizations are ditching their 401(k) plans entirely. Only around 1.3% of companies said they plan to terminate their 401(k) plan due to COVID-19, according to a recent survey from the Plan Sponsor Council of America. Approximately 16% are temporarily suspending matching contributions, and nearly 77% said they're not planning on making any changes at all to their plans.

However, the not-so-good news is that workers may not be in the clear just yet. Small businesses, in particular, are at a higher risk of facing financial problems as a result of the coronavirus pandemic, so they may be more likely to have to make changes to their 401(k) plans if money gets tight.

Approximately 42% of small businesses might be at risk of eliminating their 401(k) plans due to COVID-19, according to a report from the American Society of Pension Professionals and Actuaries. That's around 216,000 retirement plans that are at risk of termination, the report revealed.

If your 401(k) plan is terminated, or you're concerned it might be in the future, you can still save for retirement. You have other options, and you shouldn't need to put your retirement plans on hold if you lose your 401(k).

Saving for retirement without a 401(k)

You don't need a 401(k) plan to save for retirement, and if you lose your plan through your employer, you have a couple of options: Roll your money into a traditional IRA or Roth IRA, or withdraw your cash.

The option to avoid is withdrawing money from your 401(k). When you withdraw your savings from your 401(k) before age 59-1/2, you're typically faced with a 10% penalty and income taxes on the amount you withdraw. Under the CARES Act, the 10% penalty is temporarily waived, but you'll still need to pay income taxes on your distribution, although you do have three years to pay these taxes, thanks to the new regulations. If you have a significant amount of cash in your 401(k), though, that can be a hefty tax bill.

In addition, by withdrawing your cash now, you're taking away your money's growth potential. Your retirement investments need as much time as possible to compound, and if you stick them in a checking or savings account, you're essentially pressing pause on your retirement strategy.

To avoid withdrawing your savings, you can either roll your money over into a traditional IRA or a Roth IRA. Both are strong options, and they differ in one key aspect: Taxes. With a traditional IRA, you'll get a tax deduction when you make the initial contribution, but you'll have to pay income taxes on your withdrawals. With a Roth IRA, you'll pay taxes now, but your distributions will be tax-free.

You can't go wrong with either option, but right now might be a particularly good time to opt for a Roth IRA. You will need to pay income taxes on the amount you roll into your Roth account, but because the stock market has taken a tumble over the past few months, you probably don't have as much in your 401(k) right now as you did a few months ago. That means if you convert to a Roth now, your tax bill will be smaller -- and your retirement withdrawals will be tax-free. If you opt for a traditional IRA, you won't pay any taxes right now, but you may face a higher tax bill in retirement when you start making withdrawals.

COVID-19 has turned the world upside down and affected nearly every aspect of our lives, and it's also having an impact on 401(k) plans. However, even if your 401(k) is eliminated, you don't have to let it derail your retirement. By rolling your money over into a new account, you can ensure your plans stay on track.

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