With Corona Virus affecting the United States every day, many are becoming unemployed, furloughed, or laid off. With unemployment still remaining consistently high, many are reassessing their retirement accounts and wondering what their options are.
What happens to your 401(k) when you get laid off? Usually, when it comes to your 401(k), you have four options:
You could remain in the current 401(k) retirement plan if the account meets the plans required minimum balance. Staying put allows you to maintain the benefits of tax-deferred or tax-free compounding as well as being able to check your account balance. Although you can check your account balance, you cannot contribute anything financially to the account, but you can control where the money is invested.
The second option is cashing out altogether. Some choose to have their money paid to them in one lump sum or in installments over a set number of years. There are many negatives in choosing to cash out. For example, there is a 20% withholding on the pre-tax contributions and earnings portion of the eligible rollover distribution. Another drawback is dependent on the state in which you reside in and your tax bracket, which would result in additional taxes. Because of the withholding and the potential of additional taxes, and penalties, don’t be surprised if you walk away with only one-half of your money after taxes.
A third option would be to keep your existing plan, and roll it into a new employers 401(k) if allowed for by the new plan.
The final option is rolling your retirement plan into an IRA either using a direct rollover or an indirect rollover. There are two different types of IRAs, either a traditional or Roth. It is nontaxable event when rolling over into a traditional IRA. However, you’ll owe taxes on the amount of pretax assets rolled into a Roth IRA.
Contact Strategic Retirement Solutions to help you make the best decision.