What To Do With Your 401(k) When You Get Laid Off?

JJB_1994

Don’t make a hasty decision

Recently my daughter, son-in-law and grandkids came to visit during the Christmas holidays and while they were here my wife and I decided rather hastily to take a road trip.

We wanted to bring our granddaughters to the Great Smoky Mountains in Tennessee.

On a whim, we booked a cabin for a couple of nights and took off Christmas night. Our daughter and her husband headed back home and we decided to meet them half way to drop off the kids when our trip ended.

We visited Gatlinburg, Pigeon Forge and of course the Smoky Mountain national park.

JJB_1983Photo by Jerry Broussard

We only stayed two nights, but got quite a lot into our short trip and the headed home.

JJB_1935Photo by Jerry Broussard

As you can see by the photos in this blog post we saw some wonderful sights…

3 Things You Can Do With Your 401(k) 

What does my story have to do with your 401(k)?

Well, there are quite a few times in your life that you can make a quick decision and everything turns out all right, like my holiday road trip.

But, a hasty decision about your retirement nest egg is not one of them. You don’t want to make a quick decision that could derail your retirement plans! If you’ve been laid off from your job you have choices on what to do with your 401(k).

1. You can leave your money in your prior employer’s 401(k)

This is usually an easy choice, because you don’t have to do anything. But, unless your old plan is outstanding, this is probably not your best choice.

First of all, your old employer laid you off, so you probably don’t have a warm and fuzzy feeling about leaving your money there.

Second, many 401(k)s will likely pass along the extra cost of administrating your account to you, which in turn will be higher expenses and affect your overall return.

Third, if you need any help it could be harder to get someone to assist you with your account as you are no longer employed with the sponsoring company.

2. You can Roll your 401(k) to your new employer

This choice can be a great choice, but many times after being laid off it could take you a while to find other employment. And even if you do, most employers will have a probationary period during which you are not allowed to contribute anything to their 401(k). So, you could be stuck between your old employer telling you to take your money out of their plan and not being able to roll over into your new employer’s plan.

This choice also could have other drawbacks.

The main issue in most 401(k)’s today is a limit on investment choices. So, even if you are allowed to rollover your old 401(k) to your new employer, you need to do a little research and determine if their investment choices will suit your desired portfolio choices. Many plans that I see today have only 4 to 6 investment choices, hardly enough to develop an adequate portfolio.

3. You can Roll your 401(k) into an IRA

This usually one of the best choices for most everyone, because with your money in a rollover IRA you almost have unlimited investment choices.

If you’re comfortable selecting your own investments, I suggest using a firm like Vanguard to build your portfolio. They have some of the lowest cost index funds in the country and cover most asset classes that will allow you to create a well balanced portfolio. I use many of their index funds in my firms investment models. However, the main drawback is that they will give you very little advice. They are mostly there to provide the funds and you have to decide on where to put your money.

When rolling your money into an IRA or your new employers 401(k) you have two options:

-You can make a direct rollover. This option would have you roll your money directly between companies by a trustee to trustee transfer, which avoids any withholding, the 10% penalty and taxes. A check is sent directly from your old 401(k) to your new retirement account.

-You can make an indirect rollover, (which I don’t recommend). This will have your old 401(k) send a check directly to you, but they will withhold 20% tax and send that money to the IRS. Then you have 60 days to roll your money into another qualified account, such as an IRA. The big catch is that you must get the 20% from savings or somewhere else to bring your funds back to the original 100% before the rollover can be completed. If you don’t, then you will be penalized and taxed. You can see why I don’t recommend this option.

4. You can cash out your 401(k)

As you would imagine, I don’t recommend this option. By taking this option (if you’re under 55) you will do two things, first you will create a tax penalty and probably a huge tax bill. Second, you be affecting your retirement by cashing out your nest egg and having to start over.

Conclusion

If you have been unfortunate to be in the situation of being laid off, one of the best things you can do is to not make a major mistake on what to do with your 401(k).

If after reviewing the choices I mentioned above, you still have questions, simply click the contact button and pop me an email with your question and I will try to point you in the right direction.

I will answer you personally ASAP and might even use your question in my next blog post. This is how this post was created.

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Take Care,

Jerry Broussard, CFP®

 

 

 

 

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