I'm a 33-year-old woman who's been unemployed for the past six months. So far I've been doing okay living on unemployment, but the money I put into my 401(k) is just sitting there. I'm not sure how much longer I will be unemployed, and in another few months, my unemployment insurance will be done.
I had the notion of closing my 401(k) completely so I could use that money to pay off two credit cards and save the rest for an emergency. Also, I had thought to open a Roth IRA or other savings/retirement account and contribute $50 a month, so that I can start building again until I get a new job. How do I navigate this process and feel comfortable creating a cushion I can live with? — Evie
Although it’s certainly tempting to reach into your 401(k) as your unemployment insurance comes to an end, resist the urge to withdraw. Yes, there’s a level of uncertainty and uneasiness because you’re not sure how much longer you’ll be unemployed, but whatever you do, don’t cash out your retirement savings. You’ll be charged with a 10-percent penalty, plus taxes. Even though it may seem like it’s just sitting there and nothing new is being contributed, consider this to be your nest egg for retirement days ahead.
Your first item on the agenda should be eliminating your credit card debt, so refrain from opening and contributing to a Roth IRA for now. Once your debt is gone, start building a cash emergency fund in case you still can’t work. After that’s been established, then you have the green light to start contributing to a retirement account again. One benefit of a Roth IRA, though it should be a last resort, is that you can withdraw your original contributions at any time, penalty-free.
As for your job search, although full-time employment is the ultimate goal, think about other ways to earn an income while you’re still receiving unemployment benefits to give yourself a cushion. Offer your consulting services and look for part-time, freelance or temp work, as well. These options may be your quickest way in the door at a new company and can help you bring in cash. Plus, these positions may have the potential to convert into full-time opportunities.