As this year continues to see layoffs, I have been receiving more questions about 401k’s and what happens to them if you’re laid off. Basically, there are three options for your 401k. One is more flexible than the other two.
The first option is that you could leave your 401k with your former employer. The funds that you have contributed and a portion of your “company match” will remain invested in your selected portfolio mix. The financial firm will continue to send quarterly statements and your funds will continue to grow tax deferred.
The downside to leaving your money with your former employer is that you may have reduced flexibility. Typically, in employer sponsored plans, you will have limited investment choices, higher fees and limited access to make changes. Often times, people that have moved around from job to job have left a trail of 401k’s that are difficult to keep up with since they are with so many different employers and financial institutions.
Your second choice is “cashing in” your 401k. As I have mentioned in my previous posts, this should only be a last resort. Often times, the financial institutions will require withholding of 20% for potential tax liability and you may incur a 10% IRS penalty if you are under the age of 55. Plus, the removed funds will be taxed as ordinary income.
The third option is “rolling over” your money into an Individual Retirement Account (IRA). Typically, this is the best choice. There is no tax penalty when you rollover an IRA or do a trustee-to-trustee transfer. You can now benefit from total control of your money, continued tax-deferred growth, and more investment choices.
I am a big fan of having greater control of your money. If you would like more information on these choices, please email me.
Wishing You Wealth in all its Greatest Forms,
Alex
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