May 19, 2020
The coronavirus crisis has led to an unprecedented number of layoffs across the country. If you're one of the many workers whose job has been affected, you have a lot on your plate right now.
One decision you don't want to let fall through the cracks is the choice about what to do with your 401(k). If you're leaving your job, you have three primary choices, only two of which are good ones.
In most cases, leaving your job doesn't mean your 401(k) has to move. While you won't be able to contribute to it through paycheck withdrawals anymore, you should be able to leave your money invested right where it is.
Keeping your money with your current employer can be smart for a couple of reasons. You don't have to sell any of your investments (important since the market is really volatile right now). You also don't have to pay any fees associated with a rollover of the funds, which some 401(k) plans charge when you move money out.
But there are some downsides to inaction. If your plan fees are high, you'll be stuck paying them while losing benefits such as an employer match that may have made participating worth the cost.
You probably also have fewer investment options in your 401(k) than if you moved your money to an IRA. Plus with your money spread across different accounts, it can be harder to look at the big picture and see if your portfolio is balanced. When you have multiple old retirement accounts, there's even a chance you may end up forgetting about the money and leaving it unclaimed.
And if you have only a small amount of money in your company 401(k), you may not have the option to keep your retirement funds parked in your old employer's plan.
Another option, and the best one for many people, is to do a rollover of your 401(k) funds into an IRA. You can open one at any brokerage firm, usually for free with no minimum investment to get started.
You can ask for a direct rollover so your money goes right to the brokerage firm holding the IRA. Or your company can write a check to you, in which case you'll need to deposit the money into your new account within 60 days.
The biggest downside of moving your 401(k) money into an IRA is that you typically have to sell your stock to do it. And it can take some time for your money to move from one account to another, during which you're out of the market. You could potentially be forced to sell shares at a loss to move your money and then miss out on a recovery while waiting to get your money reinvested.
There are upsides to a rollover, though. You can consolidate your 401(k) money with other retirement funds you may already have in an IRA. And you can avoid plan management fees and open up the door to more investment choices.
Just be sure you keep the type of account the same. If you have a 401(k) you've invested in with pre-tax funds, you'll want to move the money to a traditional IRA. If you moved it to a Roth instead, you'd end up owing income taxes on the money, although you'd benefit from being able to make tax-free withdrawals in retirement.
Your final option is to simply take the money out of your 401(k). This is not a good option. You'll be robbing yourself of funds you need for your future. And you could end up owing penalties on the withdrawn funds.
Normally, you pay a 10% penalty on early withdrawals from a 401(k), in addition to being taxed at your ordinary rate on withdrawn funds. But the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to take up to a $100,000 withdrawal without owing this penalty if you face financial hardship due to COVID-19. You can also spread out your tax payments on the withdrawal over three years.
But while you can take at least some money out of your account without penalty, the ordinary income taxes you'll owe could still be quite high. Plus, you lose the chance for the withdrawn funds to grow into a sufficient retirement nest egg.
Putting your 401(k) money into an IRA or leaving it invested where it is are usually your best options when you leave your job.
If your work is affected due to coronavirus and you have to make a decision about your retirement account, consider the big picture -- including future financial security as well as account fees -- when you decide what to do with your money.