Layoffs have soared in certain industries over the last few months, with technology hit especially hard. More than 240,000 tech jobs were lost in 2023, according to October 2023 data from Layoffs.fyi.
If you’re among those who have been laid off, furloughed or let go from a job, your lifestyle can change overnight. You’ll also face big decisions. If you had a 401(k) with your former employer, you’ll need to decide what to do with the funds in the account. There are several options to consider, each with potential benefits and costs.
Here’s what you can do with a 401(k) if you are laid off:
— Review your 401(k) balance.
— Leave the money in your 401(k) account.
— Move the funds into an IRA or another 401(k).
— Withdraw from the 401(k) account.
— Know what happens to your 401(k) if you get fired.
Read on to learn about your 401(k) options after losing your job, along with criteria to think through before making any moves.
[Related:Laid Off at Age 60? Here’s How to Handle Retirement Savings]
Review Your 401(k) Balance
The amount in your 401(k) can impact the options available. “If your account balance is below $5,000, your employer has the option of removing you from the 401(k) plan by distributing the funds,” says David McCormick-Goodhart, a financial advisor at Savant Wealth Management in McLean, Virginia. For balances above $5,000, the employer will need to leave the funds in the 401(k) unless you ask for the amount to be removed. That amount increases to $7,000 in 2024, per changes from the Secure 2.0 Act.
If you’re not sure how much you have accumulated, check the balance of your account. For balances that are under the $5,000 threshold, you can ask your employer if the company plans to distribute the funds or if another policy is in place.
Leave the Money in Your 401(k) Account
If your account balance is above $5,000, you may decide to keep the 401(k) plan with your former employer. You won’t be able to continue contributing to the plan, but the invested money could grow over time.
Leaving the 401(k) funds at the company where you used to work could lead to some drawbacks. “You are limited to the investment options that are available in the 401(k) plan,” McCormick-Goodhart says.
You could also face the uncomfortable situation of having to communicate with a former employer to ask for an address or beneficiary change. “You may need to go through the employer’s human resources department to obtain the necessary paperwork, which can be both inconvenient and awkward after a job loss,” McCormick-Goodhart says.
[Read: How to Find an Old 401(k) Account.]
Move the Funds to an IRA or Another 401(k)
If you have another job in place, you can ask your new employer if a 401(k) plan is available. “It is typically permissible to move your old 401(k) into a new employer’s 401(k) when you get another job,” says Jason Field, a wealth planner with Fidelity in Princeton, New Jersey.
You could also choose to roll over the 401(k) into an IRA. “There is no tax due for making this rollover if no money is directly withdrawn to the employee,” Field says. “Creating an IRA will give you a very wide range of investment options, but would require someone to manage them.”
In the case that you file for bankruptcy, your 401(k) funds should have a layer of protection and creditors won’t be able to access the account. “Your 401(k) cannot be included in a bankruptcy proceeding,” says Landon Loveall, a certified financial planner at KB Financial Advisors in San Francisco.
Withdraw From the 401(k) Account
If you need funds to help cover costs like a mortgage payment and groceries, you might be considering taking money from a 401(k) account. “While it may be tempting to cash out your 401(k) after leaving your job, proceed with caution before doing so,” McCormick-Goodhart says. “These accounts are meant to be a vehicle for long-term retirement savings, so cashing out after a job loss can jeopardize your financial plan in the long run.”
Using 401(k) funds now to pay for immediate expenses could mean that later, when facing retirement, you don’t have as much available. The funds in the account also won’t be given a chance to grow during the next decades to build up a nest egg for retirement.
Taking money from a 401(k) typically leads to penalties and taxes. If you are not yet 55 years old, you will usually face a 10% penalty on the amount taken out of a 401(k) after leaving your job. The withdrawal would also be considered taxable income for that year.
[READ: How Much a 401(k) Early Withdrawal Costs]
Know What Happens to Your 401(k) if You Get Fired
The same options apply to your 401(k) regardless of whether you were laid off or fired. “One thing to keep in mind is the vested value of any employer match that has been made by the company,” Field says. “Most plans require an employee to work for a certain amount of years before the company match is considered the employee’s money.”
As you search for a new job, it may be suitable to temporarily leave the funds in the 401(k). Once you get a new job, you could check on the option of rolling the 401(k) into your new employer’s 401(k) plan. You may also look into rolling the funds into an IRA. When you’re settled into the workplace, you can revisit your retirement plan and savings strategy.
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What to Do With Your 401(k) if You Get Laid Off originally appeared on usnews.com
Update 10/27/23: This story was published at an earlier date and has been updated with new information.
