Can I Fund an IRA & 401(k) If I Have Lost a Job?

by Mark Kennan

Losing a job not only limits your personal income, but also your retirement plan options. If you are contributing to your retirement plan while employed, knowing how losing your job affects your eligibility can help you make sure you can stay on track with your retirement goals, and minimize the impact.

Losing a Job

Only current employees of a company can put money in the company's 401k plan. If you have already put money into your 401k plan before you lost your job, your employer will not require to take it out. However, because you are no longer working for the company you will no longer be able to add money to the plan.

Earned Income

Both 401k plans and IRAs require that you have compensation equal to or greater than your contribution amount for the year. Compensation does not include investment income, interest or unemployment. Depending on when during the year you lost your job, you may not be able to contribute much. If you lost your job very early in the year, you may not be able to contribute very much to either plan because you do not have enough compensation, unless you find a new job before the end of the year.

Annual Limits

If you lost your job later in the year, you are likely able to meet the compensation requirement for contributing to either a 401k plan or an IRA. However, you still cannot exceed the annual limits for either plan. As of 2011, the maximum you can contribute to a 401k plan if you are under 50 is $16,500. For an IRA, the maximum is $5,000 if you are under 50. If you are 50 and older, the 401k contribution limit is $22,000 and the IRA limit is $6,000.

Early Withdrawal

When you put money into a 401k or an IRA, you have to wait until you are 59 1/2 years old to take the money out without penalty. If you take a withdrawal before then, you have to pay a 10 percent early withdrawal penalty, plus any income taxes on the distribution. Not only is this expensive, but it takes away from your retirement nest egg.

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