No one likes losing a job, whether it’s a layoff, leaving intentionally or getting fired, financial uncertainty is a real challenge. But what happens to your 401(K) plan in the event you lose your job? Should you take the funds with you and what are the tax consequences of doing so? There are options when it comes to your retirement savings. Here are four things you should know about your 401(K) that will help you make the best decision.
No: 1: It’s Up To You to Decide What to Do With Your Account, Not Your Employer.
Even if you’ve been fired from a job, what you do with your 401(K) plan is your decision and no one can tell you what you must do. If you wish to cash out the funds, you can- although you will pay significant taxes and penalties. If you roll the funds into an IRA, you’ll avoid paying taxes and the money continues to grow. You may want to leave the funds where they are and continue investing under your previous employer. The point is, you have the final say, not your employer or the account manager.
No: 2: Contributions Are Yours to Keep, Vested Funds May Not Be.
The money you invested into your 401(K) from your paycheck and any interest it earns is yours to keep. However, your funds may not have “vested”, meaning you may not be entitled to keep 100 percent of matching funds. It depends on your account and the time frame set up by your employer. It is possible to be partially vested, in which case you would receive a percentage of matching funds.
No: 3: Cashing Out Is Not Your Best Option.
Cashing out your 401 (K) plan may be tempting, but it’s not your best option. You’ll pay income taxes on the entire amount and if you’re younger than 59 ½, you’ll also pay a 10 percent early withdrawal fee. In some cases, if you’re account is less than 2 years old, you could be charged as much as 25 percent. Finally, if you have outstanding loans against the account, you’ll need to make other arrangements for repayment -and there’s no guarantee the new terms will be as agreeable.
No: 4: There May Be Benefits To Leaving Your Account With Your Previous Employer.
It may be beneficial to leave your 401(K) right where it is. In some cases, if you lose your job at 55 or older, you can withdraw money from your account before turning 59 ½ without penalties. Plus, there are creditor protections with a 401(K) that are not available with an IRA. If your plan is a good one, investment fees may be lower- think institutional mutual funds. However, if you have less than $1,000 in your account, your employer can cut you a check. And if you have more than $1,000 but less than $5,000, they’re allowed by law to transfer your account into a Safe Harbor IRA.
Deciding what to do with your 401(K) after losing a job is a decision you will have to make after carefully considering all your options. While you have choices, some are more advantageous than others and speaking with a qualified professional will ensure you make the best decision for your specific needs and budget.