April 23, 2020
Unemployment claims have skyrocketed over the past month. Many folks are without a job for the first time in their careers—this can be an overwhelming time. Being left without your job can leave you detached from your 401k, 403b, or 457 plan. If this has happened to you, there are several options: leave the money in your old plan, wait until you are employed again and move to your new employer’s plan, roll the money into an IRA, or withdraw the funds altogether.
Leaving your account with your former company is the easiest option since it does not require any work. This option may be appealing because your existing plan likely has low fees, however you will likely also have limited investment choices within the plan. Employer sponsored retirement plans keep fees down as the plans get larger, but your investment choices will be limited by the fund line up. The fund line up is set by your plan sponsor, and limited your investment selections. While this combination of low fees and few choices may be suitable for some investors, it is not “one size fits all.”
On the other end of the spectrum, it may seem tempting to withdraw the money from your plan and pay bills or take that dream vacation. This has an obvious short-term appeal but could cost you a significant amount of money in taxes and penalties if you are under age 55 or 59½ (depending on your specific employment circumstances). The taxes and penalties can can cost you up to 50% of the value of the assets that you withdraw, depending on your tax bracket. All those dollars lost to taxes won’t be in your plan to keep growing tax deferred – that can cost you dearly.
The last option is to rollover your 401k plan assets into an IRA. This will give you additional flexibility in your investment options and will also give you more control over the account. By working with a financial professional, you can simplify the process and have an advocate looking out for your interests rather than a myriad of online and call center service options. In an IRA, the funds continue to grow tax deferred, and you may be eligible to continue contributing to your account depending on your situation.
In these uncertain and difficult times, it can feel like you’re on your own. At Brighton Securities, we are committed to giving you personal, focused advice to help you with transitions like this, and to help make your financial life easier and less stressful.