401(k) When Unemployed: Losing Your Job Doesn’t Mean Losing Control


Understanding what happens to your old 401(k) plan after losing a job will boost the success of your long-term financial strategies. By evaluating all of your options, you can determine the best way to maintain control over your retirement funds amid unemployment.

What Does the “k” in 401(k) Mean?

If you’ve ever wondered what the “k” stands for in 401(k), you’re not alone. But don’t worry, because it doesn’t really mean very much. 401(k) plans are named after the tax code section that governs them. You can have multiple accounts and each of them can change in importance and weight over time, especially if you face unemployment. Though losing a job can change your plans, you can still exercise control over a 401(k) account with a former employer if you conduct a little research and weigh your options.

So You’ve Left Your Employer. Now What?

Furloughed, quit, laid-off – whatever the reason for leaving your employer may be, you now need to consider what to do with the 401(k) funds you’ve built during your employment. Approximately 30% of adults choose to cash in their 401(k) funds during unemployment; however, this is not always the best choice. Cashing in early can carry penalties and even a 20% tax on your money. Early withdrawal can also hinder any progress you’ve made toward retirement.

Instead, you may want to consider other options such as leaving the funds with your former employer. Of course, there is an obvious benefit to this “leave it and forget it” approach – it’s certainly one less thing to think about during a potentially stressful time of job searches and interviews. Still, there are drawbacks to this strategy. Leaving the funds in place would mean you’d have one more account to manage, you could face additional costs and fees, and your investment opportunities may be minimal.

If you’ve found new employment, you can consider moving your old 401(k) into your new employer’s plan. This transition can be relatively quick and straightforward, which has clear benefits; however, this option could also trigger additional costs and fees and can minimize your investment opportunities.

Roll with It

Instead of cashing out early, leaving the funds with your former employer, or transitioning the money into a new employer’s account, you may want to consider rolling the funds into an IRA. With an IRA, you can avoid penalties and additional taxes. You can also use these funds to strengthen your long-term retirement goals. With this option, you’ll want to evaluate the best IRA for your situation: a Roth IRA or a traditional IRA. Whatever proves to be the best option, an IRA could provide the optimal opportunity to protect your money and keep your goals on track.

How to Know What’s Ahead

When you’re unemployed, it can be hard to know what’s ahead. Adding financial decisions to this atmosphere can make a clear path even harder to detect. Yes, managing your 401(k) during unemployment can seem overwhelming and uncertain, but it doesn’t have to be. With some research and guidance, you can maintain control over your finances. At Wickham Financial & Insurance Services, our team can explain your options and evaluate what options work best for you. Together, we can determine the best step forward into your financial future. If you’d like to learn more about 401(k)s and options you have, be sure to watch our “401(k) Plans” video on our Informational Videos page.


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