Whether you lost your job or you quit, it can be difficult to know what to do next. One of the biggest sources of uncertainty of unemployment is knowing what to do with your retirement accounts during an employment lapse. Fortunately, you have several options for what to do with your retirement accounts. Many of these options allow you some freedom and even put you in a stronger financial situation moving forward.
What to do with your 401(k)
When you leave your job, you generally have four ways you can handle your old 401(k) account: leave it where it is, roll it over to a new 401(k), roll it over to an IRA, or cash it out. Each of these options is contingent on what your next step is and if you need to use the money during your lack of employment.
Leave your account there
If you don’t have another job lined up, your best bet may be to just leave it where it is for now. This is a good option if you do not have another account to roll your 401(k) into such as an IRA or a new employer’s retirement plan. You may want to simply leave your account as is, then roll it over to another account later on.
Roll it over to your new 401(k) plan
When you do start a new job, you may have the option to rollover your old 401(k) account to your new employer’s plan. You should speak with your Human Resources department lead to see if the new plan allows for rollovers. If so, you can call your former 401(k) provider to initiate the rollover. They will typically send a check to you or directly to your new 401(k) provider. If your new employer and former employer use the same 401(k) provider, a phone call is usually all it takes to combine the two retirement accounts.
Roll it over to an IRA
You could also choose to roll over your old 401(k) to an IRA. The advantage of this is that you may have more investment options with an IRA. With a 401(k) account, your employer will select the investment options, but with an IRA you can choose who manages your account and what investments make the most sense for your portfolio.
Withdraw the account
Your last option, and typically the least advisable, is to withdraw your funds. If you’re out of money and need to buy groceries or make a mortgage payment, it can be tempting to consider withdrawing your 401(k) for cash. However, by taking money from your 401(k) account, you both endanger your future financial plan as well as take a penalty on it upfront.
Typically, when you take money out of your 401(k), you may have to pay a 10% penalty on the money when you withdraw it if you are under 59 ½ years old. The withdrawal would also be considered taxable income for the year, meaning you will have to pay income taxes on your total distribution amount.
However, due to the current state of the nation, the CARES Act has dictated that individuals may withdraw up to $100,000 from their 401(k)s without paying the penalty. People who borrow against their 401(k)s will be required to pay back the borrowed amount in full over the next three years. If they do not pay the amount back, they will be charged 10% of the amount they have not repaid.
If you are considering this option, be cautious. Your 401(k) is designed to gain compounding interest over time. Whether you decide to repay your borrowed 401(k) money or not, using the money for current pressing financial matters means you won’t have this money available in your golden years. Also, you’re taking away the chance for your funds to grow and build throughout your career.
Even if you need cash, speak with a financial planner about your other options before you make a withdrawal.
What to do with your other retirement savings
Not only will you want to create a strategy for managing your 401(k) account, but you will want to review your other retirement savings vehicles as well. From IRAs to stock options to rental properties, it’s wise to review all your retirement accounts during an employment lapse. Since you may not have money coming in from your employer, you should review your financial situation so you know how to move forward.
Find out the rules of your stock options
If your previous employer had stock options or an employee stock program, you should figure out the rules for vesting and how to get your money from the company. These rules vary from company to company, so it is important to contact your former employer’s Human Resource department to understand your rights. You should also ask about tax implications and any restrictions relevant to your stock options.
Evaluate your contributions
If you were contributing to an IRA before your lapse in employment, you may want to evaluate your contributions. Once money goes into a retirement account, it’s difficult to get it back without paying huge fees. Therefore, you might want to pause your retirement contributions until you find new employment just in case you need to use the cash.
If you do not use the money during your lapse in employment, you can always make a lump-sum contribution to your retirement account once you have a new income stream.
Update your household budget
When you move jobs, you should take the time to revise your household budget. If you have a lapse in employment, you might want to cut costs in some areas and evaluate your spending based on what you have available in savings. You may need to tap into your emergency fund.
But be sure to stay clear of using extra credit during this time. It is not advisable to maintain your lifestyle using credit cards, especially if you can’t pay them off due to a lack of income.
Open a high-yield checking and savings account
You may be able to earn some interest from your checking and savings accounts, even during unemployment. Interest rates on high-yield accounts are still very low but are often far more competitive than standard checking and savings accounts. You may want to see if your bank has a high-yield savings option or consider changing banks.
Rebalance your accounts
Even if you can’t contribute to your retirement accounts, you may want to make sure they are rebalanced. Rebalancing your accounts will ensure that your money is working for you. When you select investments for your portfolio, you also select different weighted values for each asset within the account. Since asset prices can fluctuate due to different market conditions, it may throw these percentages off. To get your percentages back to the desired or original levels, it’s important to rebalance.
However, you shouldn’t just evaluate the asset allocation of your retirement accounts during an employment lapse. It’s wise to evaluate your retirement portfolio regularly and you can take the time to speak with a retirement specialist or your financial planner to ensure that you are not over or under-invested in any certain area.
The bottom line
The uncertainty that comes with an employment lapse is unavoidable. However, by making the right money moves, you can minimize the impact your unemployment has on your current finances as well as your retirement savings.
As in any tumultuous time, it is wise to consult with an expert. Our team is ready to assist you with any retirement questions that you may have to help you increase your odds for a smooth and successful plan to retirement.