What to do with your 401(k) when you lose your job

Losing a job can turn you upside down. It’s hard not to hit the panic button. Instantly there are new problems, like how to pay the rent or mortgage. But then there are questions like what to do with your 401(k)?

This is a big decision. You want to get it right. Here are key considerations.

Exhale

"Do not rush to make a decision. The assets are held securely for you, invested, may still be growing, and are not going anywhere. Getting a new job is your priority," says Richard Schwamb, financial adviser and corporate retirement director of The Legacy Group at Morgan Stanley in Jericho.

Think things through. "Resist the first impulse to just ‘cash out’ and take the money and run," says Carol O’Rourke, a certified financial planner with SHOR Financial Wellness in East Hampton.

Cashing out has consequences, although less so this year. Under the CARES Act, the usual 10% penalty is waived even if you are younger than 59½. You will still have to pay income tax on the amount you withdraw. You can withdraw up to $100,000 this year from your plan account (vs. $50,000 normally). Income tax can be paid to the IRS over three years instead of all being paid for the 2020 tax year.

But Brian Cohen, an investment adviser and principal with Landmark Wealth Management in Melville points out how this can be detrimental to your retirement. "You lose the power of compounding."

Know your options

Basically you can do one of several things: leave your old 401(k) account at your prior company; roll your 401(k) into your new company plan; roll your 401(k) into an IRA account at any financial institution; and cash out.

You are hip to how withdrawing is not the ideal choice, unless your finances, especially during the pandemic, are such that you won’t be able to survive without that money. But what is the skinny on the alternatives?

Maybe you would like to leave your account with your former employer. "This might be the easiest thing to do, it’s not always the best. People often fail to monitor accounts held at former employers as closely as they should. This problem can worsen if an individual ends up leaving money behind in several different former employers’ 401ks," says Kyle Ryan, executive vice president, advisory services at Personal Capital in San Francisco.

Furthermore, the main benefit of a 401(k) plan is an employer match if the company offers one. Once you leave a job, you no longer receive the match.

You could roll over your account into your new employer’s plan. By all means though, do a little due diligence. Look at the type of investments offered, fees and all the rules and regulations before signing on.

One of the best options, says Lou Cannataro, a partner with Cannataro Park Avenue Financial in Manhattan, is to roll your 401(k) into your own IRA. "The moment you leave a firm and can gain control of your retirement assets, you should. When the money is in your individual retirement account, the investment options are wide-open. You can invest as you see fit, whether it's actively managed funds, ETFs, ESG funds and/or individual stocks and bonds geared to your risk tolerance and investment goals."

However, roll over your account properly so the tax deferral is preserved. Says O’Rourke, "Arrange for the account to be transferred from the retirement plan directly to the new account, whether an IRA or another 401(k). Don’t make the transfer yourself."

This is one time you probably don’t want to go it alone. Talk to your financial adviser.