As the economy continues to founder, many companies are attempting to stay afloat through downsizing. Unfortunately, while this might benefit the companies in question, it undoubtedly has a negative effect on the employees who are suddenly out of work. There are many dilemmas facing someone who is newly unemployed, and one of these questions is what to do with the employer-offered 401k now that the job is gone. Read on for tips about handling your 401k after a sudden job loss.
What Happens to Your 401K?
First, just take a moment to gather your thoughts. Your 401k is perfectly safe for the time being, so you don’t need to act immediately. In fact, if the money in your 401k totals more than $5000, you cannot leave it in the care of your former employer until you are 65. Balances between $1000 and $5000 are eligible for transfer by the former employer into an account known as a Safe Harbor IRA.
If your account balance is less than $1000, your former employer may simply close the account and send you a check for whatever is left after withholding 20% of the balance for taxes. However, if you wish to get your money out of your former employer’s control, there are a number of different options available to you if you simply take a little time and look them over carefully to determine which option is best for your particular situation.
What Not to Do
It might be tempting to pull the money out of your 401k as soon as you lose your job, but you should consider other options. Hopefully, you received some sort of severance package from your former company, and you’ve got a bit of a cushion in your savings account that can tide you over until you find a new job.
There are several reasons to avoid cashing in your 401k. For one thing, you will be charged taxes and fees if you decide to pull the money out prematurely. In addition, taking the money, no matter how insignificant the sum may seem to you, is essentially obliterating your nest egg for retirement. It’s smart to keep that chunk of money safely out of your own reach, so that you can continue to build upon it for your future.
If you choose to keep the money safely invested in the 401k, you can also roll it over to your next employer’s plan. This is particularly helpful if you happen to find a new job very quickly. Not only will you be able to keep your money all in one convenient place, but you can also add to it through your new employer. You will be a bit more limited in terms of your choices for investment, but you will have creditor protection that is not available to people who invest in IRAs—in other words, if you should find yourself in financial hardship and your assets attached by an outside creditor, your 401k will not be eligible for garnishment.
What if Your New Employer Does Not Offer a 401K?
If your new employer doesn’t offer any 401k options, an IRA is a good choice. You will enjoy a more diverse assortment of investment options, and you will have more control over the cash you invest. You can easily withdraw your money without penalties for such worthy causes as purchasing your first home or for expenses associated with education.
As of 2008, you can directly roll your 401k into a more flexible Roth IRA. These IRAs feature penalty-free withdrawals after you’ve held the Roth for five years or more, and are 59 ½ years old. This is much easier than the old process of rolling the 401k into one of the traditional IRAs and eventually moving the money over to the more liberal Roth IRA.
Choosing a Financial Advisor
If you’re not sure how you want to handle your particular 401k, never hesitate to seek the advice of a qualified financial planner. These people are well versed in the many different options that are available to you, and who can help you to determine which one is best for your financial situation. Do your research to ensure that you find a planner who is actually qualified to advise you.
Ask friends and family members for names, and a quick internet search can usually produce the adviser’s credentials. Losing your job is stressful enough in itself. You don’t need additional stress created by a shady financial planner. Your financial picture might seem a bit cloudy now, but if you hang on to your 401k in one of the methods discussed above, you will be able to see a brighter financial future as time goes by.
Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!