Losing your job unexpectedly is never fun. It usually means confusion, frustration and, all too often, financial turmoil. In financial emergencies, it might be tempting to tap into your retirement plan for funds. But this can be costly, now and later in life.
Similarly, the options available to you regarding keeping, moving or cashing out your employer-sponsored retirement accounts, such as 401(k) and 403(b) plans, can be confusing.
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Here’s a primer on your options and how to keep your retirement plan on track.
If you have less than $7,000 in your 401(k) or 403(b) when you leave your job, your employer may automatically roll it over to your new employer or into an IRA if you have no new employer.
If you have more than $7,000 in your 401(k) or 403(b), you generally have four options, according to Fidelity.
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If your employer allows it and you like your plan’s investment choices, you have the option to keep your account just as it is. The one caveat is that you will not be able to contribute money to it any longer.
But you will continue to enjoy tax-deferred earnings in your investments.
If you prefer, you can roll over your funds into an IRA with no taxation or penalty. This way, your money still grows tax-deferred and you can continue to contribute to it.
If you get a new job with a 401(k) or 403(b) plan and would like your retirement money in one place, ask your employer to transfer the money directly to your new employer.
The other option is for them to send you a check to move the funds. However, if they do this, they are required to withhold 20% of the money for potential taxes. You then have 60 days to deposit the money into a new 401(k) or 403(b) plan to avoid early withdrawal taxes and penalties.
You do have the option of cashing out your retirement plan. However, carefully consider this since it opens you up to taxes and potential penalties for early withdrawal if you don’t meet IRS regulations for certain accounts.
Depending on the account, the taxes could be anywhere from 10% to 25%, per the IRS.
Because early withdrawal penalties and taxes can hit your retirement savings so hard, you should consider other options to get through any financial turbulence.
