It’s no secret that many people throughout the United States are experiencing some unexpected layoffs. However, whether you saw the writing on the wall or if the loss of a job has come as a complete surprise to you, the question remains…what should you do with your retirement accounts?
Understanding Your 401(k) Options Post-Layoff
When you leave your job, your 401(k) doesn’t vanish; it’s still your money – every dollar you personally contributed to your 401(k) is yours to keep, no matter what. That money, along with any investment gains from your contributions, is not tied to your employer. Even if you’re laid off unexpectedly, you don’t lose what you’ve put in.
What About Your Employer’s Contributions?
The money your employer contributed on your behalf – through matching or profit-sharing – is a little more complicated. That portion of your 401(k) may be subject to a vesting schedule, which determines how much of it you actually get to keep if you leave the company.
How Vesting Works in a Layoff
- Your Contributions: Always 100% yours. No employer can take back the money you contributed from your paycheck.
- Employer Contributions: May be partially or fully yours, depending on your company’s vesting schedule.
- If you were fully vested at the time of your layoff, you keep 100% of the employer contributions.
- If you were partially vested, you get to keep only the vested portion, and the rest may be forfeited.
- If your company had a cliff vesting schedule, where you had to stay for a set number of years before getting any of the employer match, you may lose all unvested employer contributions.
What If You Were Close to Being Vested?
Some companies may offer severance packages that include an adjustment to your vesting schedule, allowing you to keep more of your employer’s contributions. It’s worth asking HR about this if you’re negotiating your exit package.
When it comes to moving forward after the layoff, you generally have four primary avenues to consider:
Leave the Money in Your Former Employer’s Plan
If your account balance exceeds $7,000, many plans allow you to keep your funds where they are. This means your investments continue to grow tax-deferred. However, you won’t be able to make additional contributions, and it’s essential to monitor the plan’s performance and fees.
Roll Over to an Individual Retirement Account (IRA)
Transferring your 401(k) into an IRA can offer a broader range of investment options and potentially lower fees. This move maintains the tax-deferred status of your savings. Ensure you execute a direct rollover to avoid potential taxes and penalties.
Transfer to a New Employer’s 401(k) Plan
You may not have a new job just yet, but when you find the right fit that job might offer its own 401(k) plan and could accept rollovers, and consolidating your old 401(k) into the new plan can simplify your retirement savings management. This approach keeps all your funds under one umbrella, making it easier to track and manage your investments.
Cash Out (Withdraw the Funds)
While accessing your funds immediately might seem tempting, this option comes with significant drawbacks:
- Taxes and Penalties: Withdrawals are subject to federal income tax. Additionally, if you’re under 59½, a 10% early withdrawal penalty typically applies.
- State Taxes: Depending on your state, additional taxes and penalties may apply. r
- Lost Growth Potential: Removing funds halts their tax-deferred growth, potentially impacting your long-term retirement goals.
Considering a 401(k) Loan
While employed, some plans allow borrowing against your 401(k). However, post-layoff, this option isn’t typically available. If you had an outstanding loan at the time of your layoff, you might need to repay the balance within a specific timeframe to avoid it being treated as a distribution, which would incur taxes and penalties.
Keeping Track of Everything
As of May 2023, over 29 million forgotten 401(k) accounts existed, totaling more than $1.6 trillion. This is why managing your retirement accounts when you transition jobs is so important – make sure you’re keeping track of everything or consolidating the accounts to make management easier.
The good news is that as of 2024, there is a federal database to help you find any lost 401(k) accounts. CLICK HERE to access the “lost and found” database.
I know that navigating a layoff can be a stressful time, even when you know it’s coming. And maybe the last thing you want to think about is your retirement accounts while you’re dealing with everything else. Remember that working with a financial advisor means that they’ve got your back and you can lean on them during difficult times. They can help you make sure that nothing gets lost in the mix while you’re figuring out your next move.
I’m here to help. CLICK HERE to make an appointment.
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