COVID-19 has put millions out of work and shuttered businesses across the country.
And while local economies have started to reopen, a surge in cases has reminded us that we’re still far from returning to any sort of “normalcy.”
Most people are focused on keeping a job right now – retirement is the last thing on their mind. But if you’re part of the roughly 8.4% of Americans who find themselves out of work, you may need to find a new spot for that employer-sponsored 401k.
So what are your options? Do you take the money and run? Can your former employer hold onto the cash for you? You’ve got choices. Here are three different courses you can take.
A 401k is a beautiful thing. It’s a retirement account that can give you free money. But its allure doesn’t end there – it doesn’t necessarily need to be actively managed, either.
If you lose your job, and in turn your retirement account, you can leave the account with your employer. Your account will continue to earn (or lose) money depending on the market. The only difference is that you can no longer contribute to the account.
Note that keeping a 401k with your old company won’t always be an option; it depends on how much money you have stored in the account. Some employers won’t keep accounts under a certain dollar amount.
While this option is convenient, it’s not always the best move. The biggest drawback is that many employees forget about the account. And if you don’t know the account is there, it’s harder to develop an all-encompassing financial strategy.
Millions of people leave 401ks behind. Some forget about them completely. If you do opt to keep your account with a former employer, make a note of it. You don’t want to forget about your hard-earned cash.
Another option is rolling over – or transferring – your 401k to a different account. This could be to a new employer or an Individual Retirement Account (IRA).
A rollover is beneficial in that it allows you to continue to actively manage your money. This way you won’t forget about it, and you’ll take it into consideration when devising long-term financial strategies.
If you get a new job (congrats!), it’s as easy as talking to both your former and current employer to make the rollover happen. But if you’re still unemployed during the pandemic, an IRA is another viable option.
There are two types of IRAs: a Roth and a traditional. A Roth IRA taxes your earnings when you deposit them; a traditional IRA taxes the money when you withdraw. Which option works best for you will depend on several things. For starters, it’s important to understand that the only difference between the two is how they’re taxed.
The last option you have – and the least recommended – is to withdraw your 401k money.
It may seem like a good idea, especially if you’re in dire financial straits. However, in most cases withdrawing from a 401k fund will be costly. If you’re younger than 59 ½ you’ll be charged penalty fees to withdraw from the account; that’s not to mention the taxes you’ll have to pay on the money itself.
The most detrimental aspect of an early 401k withdrawal is that you’re losing funds for retirement. Your 401k is set aside to offer financial stability during your post-work life. By draining your nest egg early, you’ll be without a safety net come retirement.
How you handle your 401k is up to you. It also depends on your particular financial circumstances.
The upshot: You’ve got options, but taking money out early likely isn’t a good idea. Do your research and ask for help if you need it. There are numerous financial literacy tools available online, too.
Money management is important, especially during a global pandemic. If you’re able to, take this time to reevaluate your financial habits. Plan ahead and take into consideration the unexpected. The earlier you start thinking about your financial future, the better.