What To Do With Your 401(k) After a Layoff

The year 2023 has been a tough one for many in the tech sector. As of June, over 148,312 employees at U.S.-based tech companies have been laid off, according to Crunchbase News. Among the giants, Amazon, Alphabet, Microsoft, and Meta, to name a few, have seen significant workforce reductions. Even smaller companies like Chegg, 23andMe, and Grubhub couldn’t escape the wave of layoffs.

If you’re one of the many tech sector employees impacted by these job cuts, you’re probably dealing with a mix of emotions and uncertainties. One critical question that might be on your mind is: What should I do with my 401(k) plan?

Here’s a step-by-step guide to help you navigate your 401(k) after a layoff:

1. Don’t Panic

Firstly, don’t panic. The balance in your 401(k) is still yours. The critical thing is to make informed decisions about your next steps, rather than making hasty moves out of stress or fear.

2. Review Your Current Financial Situation

Understand your financial situation. Do you have an emergency fund to cover your expenses for the next few months? Do you have high-interest debt that needs immediate attention? Answering these questions will help you determine the best course of action for your 401(k).

3. Evaluate Your Options

Generally, you have four options with your 401(k) after a layoff:

Leave it with your former employer:

If your 401(k) balance is over $5,000, you typically can leave the funds in your former employer’s plan. While this option requires the least immediate action, you must consider the fees and investment options available in the plan. Some employer-sponsored plans may have higher administrative costs or limited investment choices compared to an IRA.

Roll it over to a new employer’s plan:

If you’re moving to a new job, transferring your 401(k) to your new employer’s plan can keep your retirement savings consolidated. However, not all employer plans accept rollovers, and the quality of investment options can vary. Before choosing this option, compare the fees, investment choices, and loan provisions between your old and new employer’s plan.

Roll it over to an Individual Retirement Account (IRA):

Rolling over your 401(k) to an Individual Retirement Account (IRA) allows you to maintain the tax advantages while potentially gaining access to a broader range of investment options. However, IRAs may lack some of the protections afforded to 401(k) plans, such as protection from creditors and the ability to take a loan against your balance.

Cash it out:

While cashing out may provide immediate financial relief, it comes at a steep cost. Besides the loss of future growth on your savings, cashing out a 401(k) before age 59½ incurs a 10% early withdrawal penalty and immediate income tax on the distribution.

Comparing Your 401(k) Options

Here is a comparative overview of each option:

Leave with EmployerRoll Over to New EmployerRoll Over to IRACash Out
Requires Immediate ActionNoYesYesYes
Maintains Tax AdvantagesYesYesYesNo
Wide Range of InvestmentsNoVariesYesN/A
Protection from CreditorsYesYesVariesN/A
Early Withdrawal PenaltyN/AN/AN/AYes
Loan OptionsNoVariesNoN/A

4. Seek Professional Advice

Making the best decision requires careful evaluation of your individual financial situation, goals, and comfort with managing investments. It may be beneficial to consult a financial advisor or retirement specialist to help guide your decision. A professional can provide personalized advice tailored to your situation and help you navigate the complexities of retirement planning.

Losing a job is tough, but remember, this is a hurdle, not a roadblock. By understanding your options and making informed decisions, you can ensure your 401(k) continues to serve its purpose: providing a secure financial foundation for your retirement. You’ve spent your career in the tech industry overcoming challenges, and with the right knowledge and support, this is another challenge you can surmount.

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