Written by Pat Brown, MBA
Losing your job is a stressful experience, and one of the most important financial decisions you’ll need to make is what to do with your 401(k) or other retirement accounts. Since these accounts are designed for long-term savings, handling them correctly can make a significant difference in your financial future.
This guide will walk you through your 401(k) options after a layoff and help you avoid costly mistakes.
Step 1: Understand Your Options
When you leave your job, you generally have four choices for your 401(k) or 403(b) retirement account:
1. Leave It in Your Former Employer’s Plan
✅ Best for: Low fees, good investment options, or if you’re close to retirement.
🚫 Downside: You can’t contribute anymore, and some employers charge ex-employees higher fees.
Many employers allow you to leave your 401(k) in their plan, but you lose the ability to make new contributions. If you’re happy with your investment options and the fees are low, this could be a good short-term choice.
2. Roll It Over to an IRA (Recommended for Most People)
✅ Best for: More investment options, lower fees, and continued tax advantages.
🚫 Downside: Requires setting up a new account and managing the transfer process.
A 401(k) rollover into an Individual Retirement Account (IRA) is often the best move. This keeps your retirement savings growing tax-deferred (Traditional IRA) or tax-free (Roth IRA) while giving you greater flexibility in choosing investments.
💡 Pro Tip: Always request a direct rollover to your new IRA to avoid taxes and penalties. If the check is made out to you instead of your new IRA provider, 20% will automatically be withheld for taxes.
3. Transfer It to a New Employer’s 401(k) Plan
✅ Best for: Simplicity and if the new employer’s plan has good investment options.
🚫 Downside: Limited investment choices and potential high fees.
If you start a new job with a solid 401(k) plan, transferring your old 401(k) to your new employer can help keep everything in one place. However, make sure the new plan has good investment options and reasonable fees before choosing this route.
4. Cash It Out (Avoid if Possible!)
🚨 Warning: Cashing out your 401(k) is a last resort! 🚨
✅ Best for: Extreme emergencies with no other financial options.
🚫 Downside: Heavy taxes, penalties, and lost retirement savings.
If you withdraw money from your 401(k) before age 59½, you’ll face:
❌ A 10% early withdrawal penalty
❌ Income taxes on the withdrawal
❌ Lost future growth (potentially hundreds of thousands in retirement savings)
Example: If you cash out a $50,000 401(k) balance, you could lose $15,000 or more in taxes and penalties right away!
If you absolutely must access money, consider borrowing from other sources first.
Step 2: Avoid Common Mistakes
✔ Don’t cash out unless it’s a last resort – Your future self will thank you.
✔ Watch out for tax withholding – If you take a lump sum, your employer will automatically withhold 20% for taxes.
✔ Don’t forget about old 401(k)s – If you’ve worked multiple jobs, track down all your accounts.
✔ Make a plan quickly – Some employers require you to move your money within 60 days after leaving.
Step 3: Consider Your Next Steps
If you’re not sure what to do with your 401(k) after a layoff, here’s what to do next:
📌 Check your account balance and employer’s rules – Log into your retirement account and review your options.
📌 Compare fees and investment choices – If your employer’s plan has high fees, consider rolling over to an IRA.
📌 Consult a financial advisor – If you’re unsure, seek guidance on the best option for your long-term goals.
Final Thoughts
Your 401(k) is a valuable asset, and making the right decision after a layoff can have a big impact on your retirement. The best option for most people is a direct rollover into an IRA to keep growing your savings without penalties or taxes.
For more financial guidance after a layoff, visit www.laidofffromwork.com.
