What to do with your 401k plan after a layoff

If you’re like most professionals, you may have to deal with the financial fallout of a layoff at some point in your career. It’s understandable if you haven’t thought about what you’d do in that situation—nobody wants to imagine themselves without a job. That said, you’d be wise to plan for such a scenario, and a big part of that is knowing what to do with your 401(k) plan.

A 401(k) is a retirement savings plan sponsored by an employer, so once the employer is out of the equation, you need to do something with the money you accrued. When you’re suddenly without income, your knee-jerk reaction might be to tap into your 401(k) in order to make it through your period of unemployment. This is not the best move and should be resorted to only under dire circumstances. Ideally, your emergency fund or severance package can help you make ends meet while you're between jobs.

But what exactly do you do with your 401(k) plan? Thankfully, there are a few ways to allow that money to continue to grow on a tax-deferred basis for your retirement. To help explore your options after a layoff, Monster consulted with a retirement planning counselor to help break it down.

Don’t spend it

As mentioned above (and it bears repeating), your 401(k) is intended for your retirement and you should aim to keep it that way, says Andy Whitaker, president of Gold Tree Financial in Jacksonville, FL, and a Chartered Retirement Planning Counselor (CRPC). “There are enormous benefits in being able to fund a 401(k) plan through an employer because you get tax deferred investments and tax deferred growth,” he explains. Just because you cut ties with an employer doesn’t mean you should drain the account you started there. You’ll pay for it—literally.

“If you take money out of your 401(k), you’re going to pay income taxes,” explains Whitaker. “And if you’re 59 1/2 or younger, you’ll pay an extra 10% tax penalty.”

Ouch.

Now, there are some scenarios in which the penalty can be waived, but it’s still not ideal to take the pay day. For instance, workers who are between 55 and 59 1/2 may be able to get the distribution and avoid the penalty tax, as well as those who have high medical bills or disabilities. “You have to contact the plan administrator to find out if you’re eligible for a penalty tax waiver,” he says. 

In some cases, you might also be able to temporarily borrow funds from your 401(k) to tide you over. It’s called the “60-day rollover rule,” in which you can withdraw money, and as long as you put it back into an individual retirement account (IRA) within 60 days, you are essentially negating the fact that you did the distribution, says Whitaker.

But even if you can waive the penalty tax temporarily or altogether, cashing out will still cost you in the long run. “You’re essentially reducing the size of your retirement portfolio exponentially if you take out money before you retire,” says Whitaker. Instead, he recommends finding other ways to bridge the gap and avoid using retirement funds. Here are some of the more favorable options:

Roll it over

Rolling your 401(k) into an IRA is probably the simplest, most viable option for most people, says Whitaker. He says you just have to put in the 401(k) rollover request with your plan administrator, and they will write a check FBO (for benefit of) to your IRA account. “You don’t pay taxes or penalties,” he says. Even better, you’ll be able to control your investment allocation moving forward.

Leave it alone

You could probably leave your 401(k) plan right where it is if you’re not sure what to do. “In some cases you can’t do that, because it’s plan-specific,” says Whitaker. For instance, if you have less than a certain amount of money, some plan administrators may tell you that you have to roll it over by a certain date. And, if you don’t, they’ll cut you a check—and you’ll have to pay the penalties! If you have more than a certain amount and you don’t roll over the funds to an IRA yourself, your former employer will roll over your funds to what is known as a Safe Harbor IRA.

On the plus side, says Whitaker, you’re not withdrawing your nest egg, but the downside is you won’t have anybody managing the money for you. In his opinion, you’re better off working with a financial planner to move it into an account that you can manage on your own (or with guidance).

“This is your opportunity to take your old savings and invest them into assets that are different than any new 401(k) you may open with a new employer,” says Whitaker. “It’s a great way to diversify.”

Move it to a new employer plan

Another option is to move your 401(k) into your next plan, but you’ll need permission. “It used to be unheard of, but now this practice is becoming more prevalent,” says Whitaker, especially among larger companies.

But again, he cautions: “If you put all of your assets in one place, you don’t have another bucket being managed separately.” Meaning, all your eggs are in one basket, so to speak.

No matter which of these routes appeal to you, Whitaker recommends reaching out to your 401(k) plan administrator before you move forward. “Each one of them, by way of an agreement with your former employer, could have different rules,” says Whitaker. “In order to get the specifics, it’s best to call and ask what the options are.” Or, you can work with a financial planner who can help walk you through the process.

Get back on board

Although losing your job creates financial stress, try not to panic. Just as you need to take action with your 401(k), so should you take action with your job search. Could you use some help with that? Join Monster for free today. As a member, you can upload up to five versions of your resume—each tailored to the types of jobs that interest you. Recruiters search Monster every day looking to fill top jobs with qualified candidates, just like you. Additionally, you can get job alerts sent directly to your inbox to cut down on time spent looking through ads. We know you’re feeling the squeeze, so let the experts at Monster take some pressure off your shoulders.

This article is not intended as a substitute for professional financial advice. Always seek the advice of an attorney or financial professional regarding any questions you may have.