What Happens to Your 401(k) if You Lose Your Job?
The coronavirus pandemic continues to send economic shockwaves around the world.
Businesses in a wide range of industries, including retail, hospitality and banking, have been forced to reduce their workforces through layoffs or furloughs.
As a result, millions of Americans are still collecting unemployment benefits. Although the unemployment rate did improve to 11.1% in June from a high of 14.7% in April, weekly unemployment claims have remained elevated since March.
If you’ve been laid off, furloughed or are working fewer hours, you have many new decisions to make for your future financial health. There are many important things you’ll need to consider, such as applying for unemployment, maintaining health insurance and, of course, finding new employment.
You’ll also need to think about what happens to your retirement savings, such as a 401(k). There are a few different options for managing your retirement funds if you have lost your job. After reviewing your financial options, you’ll want to speak with a qualified financial advisor to guide you through the decision process.
Option 1: Leave Your Retirement Account with Your Old Employer
Remember, your retirement account is your money, not your former employer’s. If your balance is $5,000 or more, you may leave it in place. 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.
This should be seen as a temporary option and not a long-term strategy, because you’re no longer allowed to make contributions. So you’ll want to continue researching other retirement planning options and make permanent arrangements as soon as possible.
Option 2: Transfer 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, 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.
Option 3: Rollover 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 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.
Option 4: Take Distributions or Cash Out 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 72, you will be required to begin taking required minimum distributions (RMDs).
The CARES Act and Retirement Savings Withdrawals
The CARES Act allows some individuals to withdraw up to $100,000 before age 59 ½ without paying the 10% penalty. You are eligible for this waiver if you meet one or more of the following criteria:
- You have been diagnosed with COVID-19
- Your spouse or dependent has been diagnosed with COVID-19
- You or your spouse experience adverse financial consequences because of quarantine, furlough, layoff or reduced work hours
- You are unable to work due to lack of child care stemming from the pandemic
- You own or operate a business and have had to close your doors due to the pandemic
If you qualify, you may spread the tax penalty on such withdrawals over three years instead of just one. You may also avoid income taxes altogether if you repay the money back into your account within three years.
If you have questions about managing your money after a job loss or furlough, please schedule an appointment with Bruce at The Resource Center. Bruce and our friendly office staff are here to answer your questions and provide personalized financial services during these difficult times and in the future.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and The Resource Center, Inc. are not affiliated companies.
This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.