If you are laid off from a job, you're likely to face a variety of tough questions. But in the scramble to find a new job, manage your finances, and figure out your insurance, it's easy to overlook the decision regarding your employer-based retirement plan.
Here, we'll go over your options if you have this unfortunate event happen to you.
Do nothing
Unless your retirement savings balance is low (less than $1,000), there's a good chance your former employer will allow you to keep your 401(k) plan as it is. If the plan has adequate investment options with reasonable fees, this can be an acceptable choice.
If your plan balance is less than $1,000, you might simply receive a check in the mail -- with or without taxes withheld. Either way, this will need to be reported on your tax return.
Some plans might force your balance into an IRA of your former employer's choosing if you have less than $5,000 saved, but this can vary from company to company. Read your job's 401(k) plan documents to know if you're potentially the subject of an involuntary rollover.
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Cash it out
Cashing out your 401(k) is another of the "lower lift" choices, but recall that traditional 401(k) plan contributions are pre-tax. This means if you cash out the balance, you'll be subject to federal, state, and local taxes, as well as a 10% penalty if you're under 59 1/2. This can mean up to a 50% haircut or more on the total balance if your income is already high, and you live in a high-tax state or city.
Cashing out should only be an option if you truly need the money immediately and fully understand the tax consequences. While it might sound and feel like a cash windfall, you'll be limiting your future retirement savings in a meaningful way if you choose to take the money out in the middle of your career.
Roll it into an IRA
It will require some legwork in advance, but moving your old 401(k) to an IRA of your choice can be smart. First, you won't owe any income taxes if you roll your 401(k) to a "like-tax" IRA; in other words, a pre-tax 401(k) rollover to a pre-tax IRA won't cost you anything in taxes. Similarly, a Roth 401(k) can be rolled over to a Roth IRA with no tax charge.
Next, you'll have a far greater suite of investments to choose from, including stocks, bonds, options, exchange-traded funds, and even crypto (in certain cases). Most 401(k) plans only offer a choice of mutual funds for their enrolled employees, so if you have investment interests beyond that, an IRA can make sense for you.
Combine it with a new 401(k)
Once you've landed a new job, you might be able to merge your old 401(k) with your new one. This assumes your new employer allows "roll-ins" -- many employers do.
Combining your 401(k) accounts gives you greater control of your financial life through account consolidation since having your investments under one roof tends to make them easier to manage.
Take the time you need
Unless your 401(k) balance is very low, you can expect that your retirement money will stay where it is until you choose to move it. You'll likely have some time to decide how you want to proceed with your 401(k), which you should use to your full advantage -- even if it's not necessarily your first order of business.
No matter what you choose, be sure to look into all your options and seek the help of a qualified advisor if necessary.
