May 2023 E-Newsletter: Navigating Your 401K After Job Loss
Melissa A. Seamon, CFP®
Senior Financial Advisor
This E-Newsletter discusses options for what to do with a 401K after a job loss. The loss of a job can be a stressful and emotionally draining event. Apart from the immediate concerns about income and job searching, the impact on your retirement savings—particularly your 401K—is another pressing matter. Many employees are not fully aware of their options when it comes to managing their 401K after a job loss, and this can lead to costly mistakes.
Navigating Your 401K After Job Loss: Myths, Dangers, and Your Best Options
Let's start by debunking some common myths about 401Ks after a job loss.
Myth #1: "I have to cash out my 401K as soon as I lose my job."
False! Cashing out your 401K can have significant tax implications and should be a last resort.
Myth #2: "If I don't cash out, the money will be stuck there forever."
False! You have many options. Keep reading!
Myth #3: "I can borrow from my 401K without any consequences."
It's true that some plans allow for loans, and these must be paid back with interest. If you fail to pay back the loan, it can become a taxable distribution and may also incur an early withdrawal penalty.
The Cost of Inaction with Your Workplace 401k
Having dispelled these myths, it's crucial to understand the dangers of inaction. Doing nothing with your 401K after a job loss is a gamble. If your former employer's 401K plan has high fees or poor investment options, your savings could dwindle over time. Furthermore, neglecting to manage your 401K may lead to missed opportunities for growth in a new investment environment.
What should you do with your 401K after you lose your job?
Here are your main options, each with its own pros and cons:
1. Leave it in your former employer's 401K plan:
If the plan offers low fees and good investment options, this might be a sensible option. However, some plans may not allow this if your balance is below a certain amount. Moreover, it might be harder to manage your funds if they're scattered across multiple accounts from different employers.
2. Roll it over into a new employer's 401K plan:
This option provides continuity and allows for consolidation of your retirement savings. However, it's subject to whether your new employer's plan accepts rollovers, and the quality of the plan itself (fees, investment options, etc.). It should be noted that most retirement plans accept rollovers.
3. Roll it over into an IRA:
This is a popular option because IRAs offer a broader range of investment options than 401K plans. Plus, you can consolidate multiple 401Ks into a single IRA. The caveat is that it requires active management, and the fees can be higher than employer-sponsored plans if you don’t know what you’re doing.
4. Cash out:
Although this option provides immediate funds, it's the least advisable. Early withdrawal penalties and income taxes can significantly eat into the amount you receive. Additionally, you lose the benefit of tax-advantaged growth for your retirement savings. This option should only be used in the most desperate of circumstances.
Losing your job is undoubtedly a difficult experience. However, by understanding your options and dispelling common myths, you can ensure your 401K continues to serve its purpose: helping to provide you with a stable financial future. Always consider consulting with a financial advisor before making any major decisions regarding your 401K, as they can provide personalized advice based on your specific circumstances.
If you are in need of a financial ally, we encourage you to learn more about our services and our team to see if we could be a good match. We best serve clients looking for exceptional client service, who value a long-term partnership, and have a minimum of $500,000 in investable assets. Then schedule a call to meet with one of our advisors to discuss your opportunities.
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