If you’re furloughed, does that mean your 401k is canceled? In a sentence: no, your furlough pay reduction does not lead to 401k cancellation.

Your 401k is yours, and it stays yours. While you may not be able to contribute to your account during furloughs, you can still contribute yourself after the furlough ends. This means that if you want to keep saving for retirement, you can do so—and with the right tips, you could even get a little extra cash for your savings.

If you’re worried about missing out on potential earnings during the time your account isn’t being actively contributed to and you won’t be getting any furlough payment, remember that this isn’t unusual and it will only take a while to get it running properly again. 

In this article, you should know that furlough and 401(k) are two different things. We will look at the following:

  • What is 401(k)? 
  • What does furlough mean?
  • How is your 401(k) affected by furloughs?

What is 401(k)?

If you’re an employee and have been furloughed, you may be wondering what will happen to your 401k since you won’t be getting any furlough payment.

First, we need to explain what a 401k is. It’s an account that allows workers to contribute money from their paychecks on a tax-deferred basis. This means that you don’t pay taxes on the money you contribute until it’s withdrawn, usually upon retirement.

The plan is used by many workers and is offered by employers as part of the benefits package. Employees are given the chance to save ahead of retirement and employers are allowed to contribute as well. 

What does furlough mean?

Furlough refers to a period in which employees are given no pay and are required to stop work temporarily. Furlough is used by businesses when income is low or workload is not sufficient. An employer can decide to reduce the pay of employees or give no furlough payment at all within that period. 

During the period, affected workers are still legally employed by such a company and have certainty of returning to their jobs after. This means that employees are still considered employees by their employers even if they have been asked to stop working. But why? Because the furlough only lasts for a while—it’s temporary. Hence, employees can return to their companies after the furlough ends.

How is your 401(k) affected by furloughs?

You may have heard that if you are furloughed, it’s not a good time to make any investments or withdrawals from your 401k because those actions could be taxed at a higher rate than normal. However, this isn’t always true. When it comes to furloughs, there are different ways your 401k can be affected. Hence, you should understand how your 401(k) works during this period. 

Seek Advice

First and foremost, we recommend that you talk to a financial planner about your options. They will be able to help you navigate the best course of action for your situation. You can also read through the guidelines for your plan and see what you are eligible for. 

401(k) Loans

The CARES Act allows eligible participants to take loans of up to 100% of their vested account balance or $100,000. The act also allows such individuals to pay off their loans after a year. However, if you have taken a loan from your 401k, and are unable to repay the loan while on furlough, it may become delinquent and face penalties. 

If the loans are not paid on time, your loan account will roll over into default status during the period of furlough; therefore, if you aren’t able to make the payments while off work due to the shutdown, consider asking for an extension before interest accrues or penalties are applied. If this option isn’t available or doesn’t work for your situation, contact your employer immediately so they can help find alternate solutions for managing your debt during this period.

On Contributions 

You won’t be able to make any new contributions to your 401k during your furlough—but if you already have money in your account, it will stay there until you return to work and can resume making contributions again. However, your employer can contribute if they want to, but this isn’t common, especially during furloughs. This is because your employer is trying to bring the company back to its feet and they won’t want to add more costs to what they already have. 

The need to understand your non-accessible furlough payment for 401(k) can be a handful sometimes. But by seeking advice and understanding the terms that govern your 401(k) plan, you can feel at ease during furloughs. 

The post What happens to 401k if furloughed? appeared first on The HR Digest.

This content was originally published here.

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