Losing a job is naturally difficult and disruptive. All the decisions that stem from this event can seem overwhelming at times. From figuring out how you’re going to keep paying your bills to trying to navigate a confusing unemployment benefits application process, there’s a lot to worry about and juggle. Despite all this, it’s important not to forget about your 401(k). You likely have a good amount of money sitting there, and you’ll need to decide what to do with it.
Read on to learn what your options are when it comes to your old 401(k). Remember to speak to a financial advisor before making any final decisions.
How to Manage Your 401(k) Funds: 4 Options
The good news is that there are four well-defined ways to handle your 401(k) money. Let’s discuss what they are so you’re informed when you meet with your financial advisor to discuss in more detail what the best method is for your situation.
Keep your funds right where they are – Many individuals opt to keep their 401(k) funds in their former employer's plan if they allow it. If you personally choose to do this, you’ll continue taking advantage of tax-deferred growth and compound interest without incurring immediate taxes or early withdrawal penalties. Moreover, if you don't have much experience managing large sums of money, this option might be less intimidating because your funds will remain professionally managed. Once you find a new job and can contribute to a different qualified retirement plan, you can still access this money to withdraw it or roll it over into the new plan.
Roll your funds into an IRA – Another option is to roll your 401(k) money into either a traditional or Roth IRA. Doing so will give you more control over your savings. Furthermore, an IRA offers a more diverse selection of investments than most 401(k) plans, which will open up additional stocks, bonds, ETFs, and other investment options to you. In general, an IRA also provides access to more resources and flexibility as you plan your future retirement goals. For example, you can make contributions throughout the year as opposed to having to wait until the next open enrollment period.
Roll your funds into a new employer’s plan – After you’ve landed a new job, you can also choose to move your 401(k) investments to the retirement plan associated with your new employer. This can provide a number of benefits. For one, you’ll be more apt to monitor these investments closely because of frequent reminders and communications from your new employer’s HR department. Moreover, you might be able to take advantage of an employer match on some or all of your rollover – be sure to ask about this. Finally, rolling over your funds may give you greater flexibility down the road over when and how much income you can draw from your retirement savings while still enjoying continued growth.
Cash your existing 401(k) out – Sometimes individuals decide to cash out their existing 401(k) so they can afford living expenses while searching for a new job. This option is generally considered a last resort due to the tax implications, potential penalties, and lost growth opportunities associated with early withdrawal. Your financial advisor can likely help you find other sources of funds that are less costly in the long run.
You might not feel like you have the time or energy right now to think about your 401(k). While this is completely understandable, given the immense stress that comes along with getting laid off, it’s possible you have a substantial amount of funds in your 401(k) that need your attention. Meeting with a financial advisor now to plan out the best strategy for handling your 401(k) money will help you secure a financially sound retirement in the future.