Sadly, the headline article in the Wall Street Journal reads “Decade of Job Gains Erased in April.” The article went on to say the April unemployment numbers hit a record 14.7% and payroll numbers dropped by 20.5 million workers. No one knows for sure, but unemployment estimates during the Great Depression are around 25%. I’ve not seen any commentary that would suggest we would match the tragedy of the 1930s, but there’s no certainty. We can all hope that the numbers are at a peak, and as the country begins to reopen, more Americans will return to work. It’s a difficult time for everyone and undoubtedly compounded for those that are furloughed or have lost their jobs.
With so many issues to address during this most unusual time, tending to your 401(k) may not be a priority. When I initially meet with clients more often than not, I discover they have a trail of 401(k) assets strewn across multiple employer plans. I don’t mean to imply that it’s inherently bad if this is the case. I do find some clients have been very diligent in keeping up with multiple accounts. But I also find that many times they’ve been neglected and are not positioned to best represent the risk budget of the client or the current economic environment. Whether you’re an employment victim of COVID-19 or maybe you’ve had a robust career and have changed employers multiple times, you should take the time to evaluate your options.
401(k) Options After Job Loss or Changes
When employment terminates, employees are no longer eligible to contribute to the retirement plan. While you aren’t required to close your account, you do have options.
- Cash it out
- Leave it in the old plan
- Transfer it into the new plan (if you’re in a new plan and they allow transfers into the plan)
- Roll it into an IRA Rollover account.
I do have strong words of caution for the first option. Cashing out your plan may result in substantial taxes due. Keep in mind your contributions have been made pre-tax, and distributions will be taxed as ordinary income. You may also be subject to early withdrawal penalties.
Determining what to do may not be as simple as you think. Or it may be as simple as, “I want all of my assets under one roof.” There are many variables to consider; the biggest being everyone is a unique individual, and there isn’t a general answer that fits everyone. I encourage you to champion your cause (assets) and take control. That may mean meeting with someone like me to see how this best fits your overall financial plan. Maybe you don’t feel comfortable deciding on your own; perhaps you don’t have the time to dedicate appropriately; or reasonably so, you don’t want to do it yourself—all good reasons to schedule a visit.
That said, let’s look at the pros and cons of the remaining three options.
Leave 401(k) Assets in Your Former Employer’s Plan
Advantages
- Investment plan choices may include low-cost, institutional-class products
- Investments remain tax-deferred until withdrawal
- May be able to take loans against your account
- May not have to take any action or complete additional paperwork
- May be able to take penalty-free withdrawals if you left your old employer between age 55 and 59
- Retirement plan balances may be protected from creditors and legal judgments under federal law
- May be able to roll over to a future employer’s plan later
- Access to investor education, guidance and planning provided to plan participants
- Total costs may be lower than other alternatives
- A plan fiduciary selected investment choices on your plan menu
Disadvantages
- Investment choices would be limited to those in the plan
- Former employer may pass certain plan administration or recordkeeping fees through to you
- Even though you still participate in the plan, you would not be able to contribute any new funds
- Managing investments among multiple accounts can be a lot of work
Roll over 401(k) Assets into a New Employer’s Plan
Advantages
- Total costs may be lower than other alternatives
- Investments remain tax-deferred until withdrawal
- May be able to take penalty-free withdrawals if you leave your new employer between age 55 and 59
- Retirement plan balances may be protected from creditors and legal judgments under federal law
- Plan investment choices may include low-cost, institutional-class products
- May have access to investor education, guidance, and planning that your new employer provides to plan participants
- A plan fiduciary selected investment choices on your plan menu
- If you roll over to a new employer’s plan, you may not have to take required minimum distributions (RMDs) if you decide to keep working
Disadvantages
- Investment choices would be limited to those in the plan
- New employer may pass certain plan administration or record keeping fees through to you
- May be required to complete paperwork to have your assets moved over
- If you hold appreciated employer stock in your former employer’s plan account, there may be tax consequences. You should consult with a tax advisor
Roll over Your Old 401(k) Into an IRA Rollover
Advantages
- Assets are managed by a financial professional
- Investments remain tax-deferred until withdrawal
- Access to a wide range of investments, such as mutual funds, ETFs, stocks, bonds, and options
- Access to a wide range of tools, resources, and services
- May have the flexibility to convert to a Roth IRA
- May still have the option to move assets to a future employer’s plan later
- May be able to take penalty-free withdrawals before age 59½ in special circumstances (such as higher education expenses, health insurance premiums or first-time home purchase)
Disadvantages
- Not able to take a loan against your account
- Any outstanding plan loan balances need to be repaid before rolling over or you may incur income taxes and potentially a 10% tax penalty
- Investment activity may incur trading-related expenses, including commissions
- May not have access to the same investments in an IRA that you had in your plan
- The level of protection from creditors for assets in an IRA is lower than in a plan
- If you hold appreciated employer stock in your former employer’s plan account, there may be tax consequences. You should consult with a tax advisor
Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.