401k Rollover – What to Do When You’re Laid Off

July 11, 2017

So you’ve been laid off. You’re probably not in the best frame of mind right now and you might be a little worried because of your job situation. That combination can affect your financial judgment if you’re not careful.

Let’s talk about doing the right thing with your retirement account at your old employer. The retirement plan from your old company may be a 401k, a Simple IRA, a profit sharing plan, a 403b or some other type of plan. Each type is slightly different, but the options for what to do with the money after you’re gone are similar. Statistics show that most people are not saving enough money to retire on comfortably, so it’s important to take care of what you have accumulated so far.

Here are some options for you:

You can take all or part of your money out of the retirement account in a lump sum. Think about that very carefully because taking money out could turn out to be a very expensive option. You will have 20% deducted for taxes before you get a check. The money that you take out will eventually be taxed at your current income tax rate. Your current rate might be over 30% depending on your taxable income. If you are under 59 ½ the IRS will also charge a 10% penalty on the money that you take out. That means potentially 30 to 40% of what you take out will evaporate after taxes are paid. Take a lump sum only if you are desperate for money.

Another option is to leave the money in the retirement account. If you have a loan against your account and have a plan to pay it back, this may be your option. If you have company stock that can’t be transferred, you may want to leave the money where it is. There are a few negatives for leaving the money in the current account. Some company retirement plans have few investment choices to choose from. They may also have limitations on how your beneficiaries can receive your money should you die prematurely. You also have to consider the financial strength of your past employer. If they go out of business, consider how safe your retirement account will be.

Your third option is to transfer your old retirement account into your new employer’s retirement plan. This may or may not be possible according to the new plan. However, the new plan may also have a limited number of investments to choose from. But the fees might be competitive, you might have access to investment advice through the plan representatives or other add ons might be available so be sure to investigate the features that are offered in the new plan.

Your last option is to rollover your retirement account to an IRA. You will not be taxed on the money that you rollover because it is considered a trustee to trustee transfer. An IRA’s most appealing benefit is the control that it gives you. You generally will have a much broader mix of investments to choose from. You can use your IRA to consolidate other retirement accounts.(Fees and limitations may apply.) Consolidating accounts will make it simpler and easier to monitor all of your retirement assets. Your financial advisor will be better able to help you if you have your retirement assets together in an IRA.

Consider your options; make the right choice and good luck finding your new position.