By J.P. Dahdah, Founder & CEO of Vantage
We’re living through unprecedented times.
This time last year, we were talking about the spike in layoffs occurring due to the pandemic. This year, levels of unemployment continue to rise, but the catalyst is different. It’s The Great Resignation. Driven by a range of personal and professional factors, workers are voluntarily leaving their jobs in droves.
If you’re one of the workers who’s resigned or been let go, you know a change in work means new challenges and new opportunities. What you might not know, though, is how to manage your 401(k) through the transition.
Through what is known as a “triggering event.”
You see, whether you leave voluntarily or are asked to step away, changing your employment expands the range of 401(k) options you would normally have had.
Let’s take a look at some of the options available to you.
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1. Leave your 401(k) in the existing employer plan
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2. Move the funds into a new 401(k) account
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3. Cash out the 401(k)
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4. Roll over into an IRA
Option 1: Leave your 401(k) in the existing employer plan.
Your first option, typically, is to do nothing. To keep your 401(k) with your existing employer as you transition to a new role or out of the workforce.
However, it’s worth noting this option has a few downsides. First, you and your former employer can no longer make contributions. This could also affect any unvested funds, which would be lost upon your exit.
Second, you may experience higher administrative fees because your former employer will no longer be paying them. Instead, they pass those fees directly to you. This could result in you paying an average of 0.45% annually on the total invested assets.
All-in-all, Option 1 may be an adequate solution for the short term–as you sort out your work change and explore alternative options. But it’s not an attractive long-term solution for your money.
Option 2: Move the funds into a new 401(k) account.
The second option is moving your funds into a new 401(k) account. This option is available if you have a new employer that offers a 401(k) plan.
To transfer the funds from the old account to the new account, you will need both employers to fill out forms, as well as adhere to certain timelines to avoid taxes and penalties. You will also need to consider eligibility requirements from your new employer that detail when you’re able to enroll in their plan.
Option 2 allows you to reduce your fees and set up a stable 401(k) for your funds. But be sure to do your homework if you choose this option.
Option 3: Cash out the 401(k).
Turning your 401(k) into cash-on-hand may sound like an appealing option–especially if you’re struggling to pay the bills. But it’s critical to note that this option comes with major drawbacks.
The chief drawback of cashing out is withdrawal penalties, which kick into place if you are under the age of 59½. These penalties eat into the overall value of your portfolio. At the same time, removing your money from the market means foregoing future investment gains.
Option 3, then, is most often viewed as a last resort. If you need the money to put food on the table, cashing out is an option. But if you have alternatives, it may be prudent to explore them.
Option 4: Rollover into a Self-Directed IRA.
The final option is an Individual Retirement Account (IRA) rollover. This allows the greatest amount of flexibility and could eliminate high administrative fees. And it is tax-deferred until you make withdrawals during retirement.
You can contribute to an IRA regardless of employment status, meaning you can work for yourself and still put money into your IRA. You can choose your investments, exercising full control of your money. And you can take early distributions without showing hardship.
However, be aware that any time you take a distribution before age 59 ½, you could be subject to a 10% tax. There are a few exceptions, so check with a tax professional before taking an early distribution.
At Vantage, we favor Self-Directed IRAs because you decide where to invest your money. It doesn’t have to be invested in traditional stocks. You can invest in real estate, private businesses, and more. This can reduce your exposure to stock market swings, providing an added layer of diversification.
At the end of the day, Option 4 is a flexible and low-cost way to invest your 401(k) dollars.
Conclusion
Resignation can send your career in several different directions.
You might be moving directly to another employer, taking advantage of your new employer-sponsored 401(k) options. Or you might take advantage of the flexibility of a Self-Directed IRA.
Regardless, it’s critical to know and understand your options. The decisions you make today–during The Great Resignation–can have lasting financial impacts on your financial goals and retirement.
If you are interested in opening a Self-Directed IRA or learning more about alternative investments, please contact us at 866-459-4580.