Imagine this scenario. After 10 years with the same company, you’ve been laid off. You’ve accumulated $25,000 in your 401(k) plan over time, and you’re not sure what to do with the money. You have three options:
1) Cash out your 401(k): In other words, take the money and run. We advise against this approach. While you may be cash poor after a layoff, accessing your 401(k) funds should be a last resort. Why? Because if you are under 59 1/2, you will incur a 10% penalty on your withdrawal in addition to having to pay income tax of approximately 20% on the money. In the $25,000 scenario, you’d lose $7,500 right off the top. Not a good move.
2) Roll over: You can roll your 401(k) contributions from your current employer-sponsored 401(k) plan to a new plan with a new employer, or you can move it to a rollover IRA. This option is the most advantageous to you in the long term.
3) Leave your money where it is: If you have more than $5,000 accumulated, your previous employer is required to let you keep your money in the 401(k) plan. You won’t be able to make new contributions to the plan, but you should retain some administrative control – such as managing investment selections. Ask the 401(k) plan administrator to explain how this works.
Before you do anything, we suggest you work with your financial advisor to discuss these options, your specific financial situation and your potential tax liability. This is the best way to protect your 401(k) assets, so it’s there when you retire.
To your wealth,
Joe Maas, CFA, AVA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance