Layoff Strategy With a 401K
Q. I was wondering what should I do with my 401K plan if I were to get laid off? I couldn’t contribute as much as I could if I were employed. I also understand when you do get another job it costs you to roll it over. I have 13K in my 401K already. What would be a smart thing to do with it in the time frame of getting a new job? Just wanting to know in case I do get laid off. – Elaine
There should be no charge for rolling over a 401K Plan. We rolled over a retirement plan, but you must specify that you are rolling over the money. If someone has told you they charge for this, contact another company that handles rollovers. We use Charles Schwab.
In regards to a 401K plan, you have several options for your money in the interim of finding a new job. First, when I quit my job, my employer allowed me to "defer" doing anything with the money b/c I had enough in the account to leave it alone. This may be one option for you since you have 13K; my employer deferred at 5K. Your second option would be to take the 401K money and put it into a Qualified Traditional IRA plan. It is important that the money is designated as Qualified funds if you ever want to move it into another 401K plan. Your third option is to put it into a Regular Traditional IRA; however, if you do this, you will not be able to move the money back into a 401K. It’s very important that whatever you do, you let the company do it for you.
If your company issues you a check for the 401K funds, they are required by law to take out 20% for taxes. You can make up the 20% with you own money, which you’ll get back at tax time, BUT you have to do it BEFORE you put the funds into an IRA. You will need to check with your bank about charges. Some banks do charge an annual IRA plan fee, but I have not heard of one charging a closing fee — unless you prematurely take money out of a CD, then you have the bank penalty fees.- Rebekah
Do not cash it in — I repeat — don’t take the pay-out option!!! You have other choices – leave it where it is in your then former employer’s plan, roll it over to an IRA, or specifically request a "conduit IRA" at the time of the IRA roll-over which gives you the option of moving that particular money to a new 401K plan in the future if you want to. I also recommend that you avoid taking out any loans on that money because you will be expected to pay it all back immediately at the time your employment ends which is when you can least afford it; the other alternative would be to take a huge tax hit which, of course, you don’t want. Hope a lay-off never happens to you (it’s tough), but hope this helps if it ever does! – Tracy
When you get laid off or quit your job just leave your 401(k) alone. The company handling the 401k will send you a quarterly report and you need not do anything with the 401k til you get settled and can think about what you want to do. I have quit two jobs in the last 7 years and just left both my 401k’s alone and they are still there! Soon I will be rolling both of them over into a Janus IRA but until then they are just fine where they are. Many people think they have to "do" something with them and you don’t. – MH & SH