retirement

What to do if you lose your 401(k) match

But if you're a self-directed investor, go ahead and open an IRA.

Deciding whether to open a traditional IRA or a Roth IRA is tricky. A traditional IRA offers an immediate tax deduction (within limits), but you'll have to pay taxes at ordinary rates when you take distributions at retirement. A Roth IRA is funded with after-tax contributions, but you can take funds out tax free at retirement.

For the 2009 tax year, if you have access to a retirement plan at work and earn more than $65,000 a year -- $109,000 for married couples filing jointly -- you can't deduct any contributions to a traditional IRA. The deductibility of these contributions begins to phase out at $55,000 for individuals; $89,000 for couples. (The income restrictions are relaxed when only one spouse is covered under a company retirement plan.)

Income limits also apply to Roth IRA investors. If your income is greater than $176,000 for married couples filing jointly ($120,000 for single filers), you can't contribute to a Roth IRA, whether or not you have access to a company plan.

Know your options when a plan terminates

If your employer pulls the plug on its 401(k) plan for whatever reason, be it bankruptcy, merger or acquisition, the first and most important thing to remember is that your nest egg is not at risk. Any pre-tax contributions you make to a 401(k), plus your earnings, are yours to keep.

The matching contributions your employer made on your behalf, however, may or may not belong to you.

That's because many companies operate on a vesting schedule, which requires their employees to work for a fixed number of years to accrue ownership of the employer-contributed benefits without having to forfeit them if they leave their job.

While many employers offer immediate vesting for matching contributions, others offer cliff vesting (all or nothing) under a two- or three-year schedule, or graduated vesting on a three, four, five or six-year schedule.

A five-year graduated vesting plan is common, giving employees a 20 percent stake in their 401(k) match each year for five years until they are fully vested and entitled to 100 percent of those contributions.

Your employer will offer you several options when it closes its plan. You may be able to roll the account into a new 401(k) plan run by an acquiring company, roll the money into an individual retirement account through a direct trustee-to-trustee transfer, or take a taxable distribution.

Avoid taking the distribution if at all possible. You will owe taxes on the earnings, plus a 10 percent penalty if you're under age 59½. (The IRS may waive that penalty under certain conditions if you are "separated" from your job after age 55.)

Save smarter

When your employer pulls the plug on its 401(k) or puts a freeze on your match, it can deal your nest egg an unexpected blow.

But it's also a prime opportunity to get your financial house in order, insulate your investments and establish smart saving habits today.

"It motivates you to revisit your financial goals in light of the new circumstances and realize that you may have to put more money into your accounts to reach them," says Cook. "It's like a financial checkup, which you should be doing on a regular basis anyway."

The best part is, when the economy recovers and your company restores its contribution match, you'll be used to living with less and, as such, be well-positioned to feather your nest egg even faster.

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