Many people have lost their jobs due to COVID-19, so I thought this would be a good time to offer guidance surrounding your 401(k) options in a time of uncertainty. Also, most people change their employer every 2-3 years, so at some point, this will likely come in handy for you. So, you’ve left your job, now what do you do with your 401(k)?
Side note: Did you know millions of dollars in retirement savings are transferred as unclaimed property a year? Americans lost track of more than $7.7 billion worth of retirement savings in 2015 alone by “accidentally and unknowingly” abandoning their 401(k).- USA Today, February 25, 2018 I don’t want this to be you!
I’m here to tell you there are options! Four, to be exact, and I’ll give you all of them, however, the Townsend Tip is I recommend #1 or #2. Let me break them down for you so you can choose the best option for you.
OPTION # 1:
Move your old 401(k) into your new 401(k)
First, call your current 401(k) plan provider and ask if they allow rollovers (hint - most do). I recommend that my clients consolidate their retirement accounts for simplicity (that way, you only have to manage one account) and it’s fluffing motivating to see a higher account balance when they are all combined. Plus, there is a much lower chance you will forget about your account.
Townsend Tip: This is normally the route I have my clients take, but first check the fees (expense ratios) on the investments available within your new 401(k). If they are higher than your old 401(k) you may want to consider leaving your old 401(k) (option 3) where it is or rolling it into an IRA (see option 2).
OPTION # 2:
Roll your 401(k) into an IRA
This option is pretty much always available to you if you leave your employer and is NOT taxable.
PRO: You get to choose which brokerage house (Vanguard, Schwab, Fidelity, etc.) you have your funds at and what you want to invest in (i.e. low-fee diversified index funds please!)
CON: You may be overwhelmed by the investment options available to you and leave it 100% in cash (please don’t do this).
Townsend Tip: Check to see if you made pre-tax or/and Roth contributions to your 401(k). If pre-tax = open a Traditional IRA. If Roth = open a Roth IRA. If you have both, you need to open both a Traditional IRA and Roth IRA and roll the pre-tax into the traditional IRA and the Roth portion into your Roth IRA. This is normally my second choice if there is a Traditional IRA involved because it doesn’t allow my clients to do a backdoor Roth without paying taxes (more on this one day!).
OPTION # 3:
Leave Your 401(k) Exactly Where It Is
You can usually do this if your 401(k) balance meets their required minimum, typically $5,000.
PRO: You don’t have to do anything.
CON: There is a chance you will forget about your 401(k), investments might get out of wack and you now have multiple accounts to track & manage.
Townsend Tip: If you are currently unemployed and the plan is to one day soon be employed again by a fabulous company that has kickfluff benefits like a 401(k) this option is probably the best for you until you can roll it into your new 401(k).
Option # 4:
Withdrawal 100% (I.E put it in your bank account)
Unless you are in some dire need, I don’t recommend taking a distribution. This is not a step that will help towards growing the wealth you want. When you take a distribution before age 59 ½ there is a 10% penalty and tax will be due that could put you in a higher tax bracket. Also, you miss out on the most beautiful thing ever - compounding money!
Townsend Tip: If you are in dire need, I’m here to help. Read My Stimulus Bill Part 3 Blog - Last Resorts, where I outline the tax relief options available to you during COVID-19 with regard to tapping into your 401(k).
If you would like help determining which option is right for you or have me by your side every step of the way moving over your 401(k) schedule a FREE 30-minute call here.
