Leave of absence from work: What to know and how to plan financially

Thinking about taking a leave of absence from work? In some cases, federal or state law may require employers to offer unpaid, job-protected leave. Before you take time away from work, consider the financial impact. Unlike paid time off, a leave of absence may mean no paycheck – affecting your cash flow, savings and retirement.

There are many reasons people take a leave of absence, often driven by life events such as childbirth, adoption, illness or military service. Policies vary by employer and state, but preparing for weeks or months without income can help you cover costs during your time off.

What is a leave of absence (and what types exist)?

Leaves of absence generally fall into two broad categories: those protected by law (for eligible employees) and those offered through an employer’s leave policy.

Under the Family and Medical Leave Act (FMLA), eligible employees of covered employers may take up to 12 weeks of unpaid, job-protected leave for certain qualifying family and medical reasons (and, in certain military caregiver situations, longer). During FMLA leave, eligible employees generally maintain their group health benefits under the same conditions as if they were working. When the leave ends, employees are generally entitled to return to the same or an equivalent job. Under FMLA, qualifying reasons for leave include:

Leave that isn’t covered by a law like FMLA may not come with the same job-protection requirements. Your employer typically sets the terms, and reinstatement may depend on policy and applicable state laws. Reasons to take voluntary leave may include:

How to budget for an unpaid leave of absence

A leave of absence can mean a major hit to your income. With no paycheck coming in, it can be difficult to stay afloat. That’s why it’s important to know your pay gap ahead of time, so you can come up with a plan to cover the shortfall.

When estimating how much you’ll need, include regular bills and everyday costs like groceries and gas. Make a realistic budget and start saving as early as you can. For example, if you’re planning for a new baby, consider building savings early. If you’re planning to attend graduate school, start setting aside money when you apply.

There are several ways to build cash reserves before your leave. Cutting discretionary spending, picking up part-time work or reducing monthly bills can help. Paying down debt is important, too: with less income, missed payments can trigger fees, penalties and damage to your credit score. If possible, aim to save three to six months of expenses before you leave.

You could also review your investments to understand what cash flow (if any) they may generate. For example, some investments pay dividends or interest. In a taxable account, you may be able to take those payouts in cash instead of reinvesting – without selling shares – though payments can vary and aren’t guaranteed.

How unpaid leave can affect your retirement plan

Time off without pay may mean pausing contributions to your employer-sponsored retirement plan. Your existing 401(k) balance can usually stay invested, but your contributions – and potentially your employer match – may stop while you’re out. If you’re able, consider increasing contributions (within allowed limits) before your leave to help offset the gap. Over time, compounding can help you stay on track toward your retirement goals.

If you need cash: Options before selling investments

Even with planning, you may need more cash than expected – especially if leave is unexpected. An advisor can help you weigh options, including whether it makes sense to adjust your portfolio for liquidity or income rather than long-term growth.

You may consider tapping your 401(k) or taking a loan if your plan allows, but both can have long-term costs. Withdrawals from pre-tax accounts are generally taxable, and early withdrawals may also face an additional 10% tax (with some exceptions). Loans must be repaid on schedule, and if you leave your job, the balance may become due sooner depending on plan rules. If possible, many people try to avoid using retirement funds to cover short-term needs. Consider speaking with a financial professional – and consult your tax and legal professionals – before deciding.

If you have taxable investment accounts, you can generally access funds without an early withdrawal tax, but you’ll want to weigh trade-offs. Selling earlier than planned may reduce future growth potential, and if you sell at a gain, you may owe capital gains taxes.

If you do sell, you may want to understand holding periods: investments held longer than a year are typically taxed as long-term capital gains, which often have lower rates than short-term gains (though rates vary by situation).

Borrowing during leave: Options and risks

In an emergency, you may have to borrow. Options can include a home equity loan or line of credit, securities-based lending (borrowing against eligible investments) or credit cards. While borrowing can help cover expenses, it also increases your debt load and comes with risks – especially if interest rates are high or collateral values fall.

Borrowing from friends or family is another option, but it can strain relationships if repayment becomes difficult.

Leaves of absence are part of life, but they don’t have to derail your finances. Planning and saving before you step away can help you weather the gap and keep your long-term goals on track – even if you’re taking a temporary detour.

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