Unemployed? What to Do with Your 401k

Regardless if you quit, were laid off or fired, there are several options of what to do with your 401k investments if you part ways with your employer.

Depending on the terms of the 401k disbursements from your company regarding vested distributions, you should be entitled to take the entire enchilada and you can choose to do so in a number of ways.

Option 1: Leaving your money as it is

Even when you leave, you can still choose to keep the money on deposit in through the original plan manager. Your company will no longer make matching contributions as you will no longer have a paycheck deductions to match. If you are experiencing financial hardship by leaving the money as is, creditors will not be able to touch it and you will not get saddled with any type of early withdrawal penalties. If you opt to get a new job, that money can be easily transferred into the new employer’s 401k plan.

Option 2: Rollover to a traditional IRA

If you want to sever all connections with your former employer you can opt to roll over the 401k funds into a traditional IRA. This money will eventually be freed up, but this strategy will allow you both to avoid early withdrawal penalties and taxes and the investments will keep earning on a tax deferred basis.

Option 3: Rollover to a Roth IRA

Roth IRA’s are another option for handling your 401(k) investments when you leave your company. Although you will have to pay taxes on this type of retirement fund instrument, the payment could be worth it if you expect to earn more in retirement then while working. It could also make rolling over a Roth 401(k) easier.

Option 4: Withdraw your money

Finally, if you lost your job unexpectedly and you are getting caught in a financial mess, you can always withdrawal your money and cash out the account. In the long term it is better to leave your retirement money as is, but if your short term is going to be harshly impacted  it is better to pay the IRS a premature-distribution penalty (for those under 55) Additionally your old employer will withhold 20% of the pay out amount for federal tax purposes.

Whatever happens, do not forget your 401k. You worked hard for the money and deserve every last cent of it.