What Happens to Your 401(k) if You Lose Your Job?
When you lose or change jobs, there are a few different strategies you can take. At The Resource Center, our goal is to optimize tax efficiency and identify each client’s financial goals. In this blog, I’ll outline four common strategies that people take with some examples of when you might consider the option.
For a personal review, don’t hesitate to reach out or schedule a meeting.
Consider Transfering Your Retirement Savings to Your New Employer
Many employers will let you transfer funds from an old retirement account into a new 401(k), so ask about this when you do get a new job!
You may be required to complete a minimum length of service before enrolling in your new retirement plan. If you choose this option, it is very important to ask for a DIRECT transfer from your old plan, which is the simplest way to avoid a tax penalty. If your old plan writes you a personal check, you will have 60 days to deposit the money into a new plan to avoid taxes.
Consider Rolling the Money into an IRA
Another option for gaining more control over your money is to move your 401(k) savings into a traditional or Roth IRA account. IRA accounts are easier to access than a 401(k), and your financial advisor can provide personalized investment guidance based on your specific needs.
Ask your 401(k) plan administrator to do a direct rollover to avoid unnecessary tax penalties. This means they will deposit your funds directly into your new IRA account instead of writing you a check.
Consider Taking Distributions or Cash Out Of Your Retirement Account
If you opt for a lump sum payment before age 59 ½, you will owe a 10% penalty on top of income taxes.
However, individuals 59 ½ or older can begin taking distributions from a 401(k) without paying a 10% penalty. You will, however, pay income taxes on your distributions on a traditional 401(k). A designated Roth account entitles you to tax-free distributions if you’ve held the account for five years or more. Once you turn 73, you will be required to begin taking required minimum distributions (RMDs).
Consider Leaving Your Retirement Account with Your Old Employer
If your balance is $5,000 or more, you may leave it with your former employer. But if you have less than $5,000, you will need to either roll the funds over into an IRA or receive a check from the employer. Your retirement account is your money, not your former employer’s.
Because you’re no longer allowed to make contributions, this should be seen as a temporary option and not a long-term strategy. So you’ll want to continue researching other retirement planning options and make permanent arrangements as soon as possible.
New 2022 Retirement Law: SECURE Act 2.0
On December 29, 2022, Congress signed into law the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0. This bill includes expansions on an original law that was signed in 2019. The 2022 changes introduced several changes for small businesses and those who are saving for retirement by:
- Increasing Access for Part-Time Workers
- Allowing Emergency Withdrawals, With Limits
- Helping Employees Pay Down Student Loans
👉 Before you make an emergency withdrawal from your 401K, consider meeting with a financial advisor to review some of the legal stipulations and see if there might be other tax-efficient alternatives!
Interested in Learning More About Financial Planning?
At The Resource Center, we’re dedicated to helping individuals and families with their financial needs. Our purpose is to provide the tools you need to help enhance your financial well-being and help you work toward your retirement goals.
With our financial planning services, our team will help develop a plan that diversifies your assets, stays consistent with your level of risk tolerance, and helps you to maintain your current lifestyle.
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Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 1597516 – 12/22