What To Do With Your 401(k) If You Get Laid Off

If you’ve been laid off, furloughed or let go from a job, your entire lifestyle can change overnight. Unemployment rates hovered around 6% during the early months of 2021. There were around 10 million unemployed individuals in April 2021.

When facing unemployment, it can be natural to look at money set aside for retirement. If you had a 401(k) with your former employer, you’ll need to decide what to do with the funds in the account. There are several options to consider, but each one comes with potential benefits and costs.

Here’s what you can do with a 401(k) if you are laid off:

  • Leave the money in your 401(k) if you have more than $5,000.
  • Move the funds into an individual retirement account or 401(k) plan at a new job.
  • Withdraw the funds and face potential penalties.

Read on to learn about your 401(k) options after losing your job, along with criteria to think through before making any moves.

Look at Your 401(k) Balance

The amount in your 401(k) can impact the options available. “If your account balance is below $5,000, your employer has the option of removing you from the 401(k) plan by distributing the funds,” says David McCormick-Goodhart, a financial advisor at Savant Wealth Management in McLean, Virginia. For balances above $5,000, the employer will need to leave the funds in the 401(k) unless you ask for the amount to be removed.

If you’re not sure how much you have accumulated, check the balance of your account. For balances that are under the $5,000 threshold, you can ask your employer if the company plans to distribute the funds, or if another policy is in place.

Consider Leaving the Money in Your 401(k) Account

If your account balance is above $5,000, you may decide to keep the 401(k) plan with your former employer. You won’t be able to keep contributing to the plan, but the invested money could grow over time.

Leaving the 401(k) funds at the company where you used to work could lead to some drawbacks. “You are limited to the investment options that are available in the 401(k) plan,” McCormick-Goodhart says.

You could also face the uncomfortable situation of having to communicate with a former employer to ask for an address or beneficiary change. “You may need to go through the employer’s human resources department to obtain the necessary paperwork, which can be both inconvenient and awkward after a job loss,” McCormick-Goodhart says.

Move the Funds to an IRA or Another 401(k) Plan

If you have another job in place, you can ask your new employer if a 401(k) plan is available. “It is typically permissible to move your old 401(k) into a new employer’s 401(k) when you get another job,” says Jason Field, a financial advisor at Van Leeuwen & Company in Princeton, New Jersey.

You could also choose to roll over the 401(k) into an IRA. “There is no tax due for making this rollover, if no money is directly withdrawn to the employee,” Field says. “Creating an IRA will give you a very wide range of investment options, but would require someone to manage them.”

If you file for bankruptcy, the implications for funds in a 401(k) will not be the same as the consequences for an IRA. “Your 401(k) cannot be included in a bankruptcy proceeding,” says Landon Loveall, a certified financial planner at KB Financial Advisors in San Francisco. Creditors will not be able to access the account. “An IRA, on the other hand, doesn’t have those protections,” Loveall says.

Withdraw From the 401(k) Account

If you need funds to help cover costs like a mortgage payment and groceries, you might be considering taking money from a 401(k) account. “While it may be tempting to cash out your 401(k) after leaving your job, proceed with caution before doing so,” McCormick-Goodhart says. “These accounts are meant to be a vehicle for long-term retirement savings, so cashing out after a job loss can jeopardize your financial plan in the long run.”

Using 401(k) funds now to pay for immediate expenses could mean that later, when facing retirement, you don’t have that same amount available. The funds in the account also won’t be given a chance to grow during the next decades to build up a nest egg for retirement.

Taking money from a 401(k) typically leads to penalties and taxes. If you are not yet 55 years old, you will usually face a 10% penalty on the amount taken out of a 401(k) after leaving your job. The withdrawal would also be considered taxable income for that year.

The CARES Act and a later stimulus bill provided temporary adjustments to 401(k) withdrawals. If you met certain criteria, you may have been able to withdraw up to $100,000 without facing penalty. You can then spread out the tax impact of the withdrawal over the next three years. If you pay back the money within three years, you can avoid having the distribution marked as taxable income. It is not required that companies follow these provisions, so you’ll need to check with your employer to learn how a withdrawal during the pandemic could impact your finances and taxable income.

What Happens to My 401(k) if I Get Fired?

The same options apply to your 401(k) regardless of being laid off or fired. “One thing to keep in mind is the vested value of any employer match that has been made by the company,” Field says. “Most plans require an employee to work for a certain amount of years before the company match is considered the employee’s money.”

As you search for a new job, it may be suitable to temporarily leave the funds in the 401(k). Once you get a new job, “you will most likely have the option of rolling that 401(k) over to the new employer’s 401(k),” says Michael Morgan, president of TBS Retirement Planning in Hurst, Texas. “Your other option would be to roll your 401(k) into an IRA of your choice.”

By Rachel Hartman

Rachel Hartman, a personal finance writer, has covered topics related to budgeting, saving and investing for more than a decade. Hartman is a weekly contributor to U.S. News, where she shares insight on retirement planning and living. Her work has appeared in national and international publications including AARP and Yahoo! Finance.

Source: What to Do With Your 401(k) if You Get Laid Off | 401ks | US News

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Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. 2763, 2785 (Nov. 6, 1978).

 

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The inventor of the 401(k) says he created a ‘monster'”. MarketWatch. Retrieved 2021-02-07.

 

Deferred income guarantees before-tax dollars are saved”. Providence Journal. Providence, Rhode Island. p. B5.

 

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Can You Use Your 401(k) Funds for Purchasing a Second Home Without Tax Penalties?” Demand Media. Retrieved on January 29, 2014.

Publication 590: Individual Retirement Arrangements (IRAs), Additional Material“. Internal Revenue Service.

COVID-19 Response: Why Life-Long Learning is the Way Forward

Being an all-remote company since the very beginning, Transformify Freelancer Management System was not negatively impacted by COVID-19 outbreak. Yet, many of our clients were caught by surprise. Business interruption and declining revenues inevitably resulted in massive layoffs across the globe. Highly skilled people were struggling to find jobs during the lockdown, and unfortunately, the situation has not improved much since.

Finding a solution for all those people became a mission for our team as we realized the power of the user data gathered over the years. 

Transferrable skills

Was there anything that could make people who have lost their jobs attractive to the hiring managers of companies operating in completely different industries?

Imagine flight attendants, chefs, waiters, travel agents, thousands of them, who have been laid off or furloughed at about the same time. Why would a hiring manager from Zoom, Amazon, Walmart or any other company out there that was thriving during these challenging times hire them instead of people who had experience within the same industry?

For some time, it seemed that hardly anything could be done when out of a sudden our powerful matching algorithm served the answer in front of our eyes—transferrable skills. All these people had some skills that were relevant to more than one company or industry that would allow them to be considered for completely different jobs to those they had before.

However, to take advantage of their transferrable skills, both the job seekers and hiring managers needed to be aware of these transferrable skills and take them into account during the hiring process. We realized that we were after something that could have a massive social impact in the years to come.

COVID-19 response: Sustainable remote jobs

As Transformify Freelancer Management System joined the Digital Skills & Jobs Coalition of the EU Commission back in 2016, we submitted a new pledge titled COVID-19 Response: Sustainable Remote Jobs tackling unemployment amid coronavirus outbreak. Travel has been restricted for a period of time making it hard for job seekers to relocate in search of a job elsewhere.

On top of that, most jobs have been transformed into remote jobs anyway making it a bit easier to apply for jobs with employers based elsewhere in the world. Leveraging our technology, we made it easy for the job seekers to outline their transferrable skills and for the hiring managers to consider candidates having experience in a completely different industry.

What about considering a travel agent for a customer support job with an e-commerce company? Or considering a hotel events manager as a key account manager with an online conferencing company? Strictly speaking, they have the skills that are required to make them successful with their new roles.

However, it was anything but easy to convince the hiring managers to consider them. After all, there were so many candidates having relevant experience within the same industry, why should they give a chance to anyone else?

It took months of constant communication, press releases and lots of online events to popularize the initiative but it was worth the effort. It’s a positive change that shifted the mindset of people, both hiring managers and job seekers, toward life-long learning.

Life-long learning

As a professor at Zigurat Business School, I have the privilege to teach very bright students who have already achieved a lot in life. Mostly, these are managers in the middle of their careers, looking for their next career step and eager to learn and develop their skills. Prior to the pandemic, people who constantly invested time and effort into learning new skills were in the minority.

Now a lot of job seekers have learned the hard way the importance of having relevant skills. From developing a side hustle, to securing an independent revenue stream, to acting as an independent consultant for a period of time, to taking on freelance gigs to make the ends meet while job hunting—it’s clear that developing new, in-demand skills is an investment that always delivers high returns.

Some time ago I had the pleasure to interview Shelley Osborne, VP of Learning at Udemy, and I could not agree more with her views on life-long learning:

“Learning to me is the future of work. With today’s rate of change, there is no longer a way for us to exist without infusing growth and learning into our daily lives. We have to break down those traditional thoughts of just achieving a diploma or getting through a company training ‘because someone told me that I had to.’ Instead, it’s a mindset that persists and prevails and should instead be thought of as lifelong learning.

When I was thinking about writing, ‘The Upskilling Imperative: 5 Ways to Make Learning Core to the Way We Work‘, I knew I wanted to convey that upskilling is imperative and provide a roadmap on how we can create this culture of learning where continuous learning is the norm. The need to learn something new will always be there. It’s impossible to know what will be critical to learn in five, ten years from now so we must develop ‘learning agility’ – the idea that we are open to learning new skills, whatever those skills might be.

Life-long learning is the way forward but how do leaders predict which skills will be high in-demand in the foreseeable future?

Although there is no single answer, the best way to learn and develop new skills is to ask yourself “What am I good at?” as it is hardly possible to excel as a data scientist if you dislike math and statistics—no matter how much such skills are demanded on the market. A single Google search using keywords like “the most demanded skills”, “jobs of the future”, “the future of work” will deliver lots of relevant results.

Visiting popular job boards and filtering based on the number of posted jobs by category also provides an idea of which skills are in demand. Last but not least, visiting online learning portals and checking which courses have been trending over a period of time is also a good starting point.

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Tired of Being Kicked to the Curb? Maybe It’s Time To Be Your Own Boss

How would you make a living and provide for yourself if you got laid off by your employer tomorrow?This question isn’t entirely hypothetical in today’s dicey economic environment.

As the ongoing Covid-19 pandemic continues to hammer various industries, the number of people who suddenly find themselves without a job is growing. United Airlines recently announced it was letting go of 16,000 people. MGM Resorts, meanwhile, moved to permanently lay off 18,000 previously furloughed employees.

Not grim enough? A recent study by the University of Chicago predicted that 42 percent of all the jobs that have been lost during the pandemic are never coming back. Holding tight for a few months and hoping to get hired back when the economy stabilizes might not work this time. There may be nothing to go back to.

For a lot of people who have unexpectedly found themselves holding a pink slip in their hand, the question is: now what?

If you have severance or savings, you can live off of that for a little bit, but then what? Do you try to find a job somewhere else and risk having the same thing happen again — being let go whenever the economic winds start blowing unfavorably?

Or, do you take your fate into your own hands and become your own boss?

The good news is, this is America. You have the freedom to go out and start your own business rather than working for someone else. You can be your own boss. After all, if you’re going to bet on someone, why not bet on yourself?

Once you’ve decided that you want to jump off the hamster wheel of working for someone else and do your own thing instead, there are two main ways to go about it. You can either open a business yourself, or you can open up a franchise.

Related: Is My Business Ready to Franchise?

It’s helpful here to take a look at some of the pros and cons of each approach.

Starting your own business is like going into a forest without an ax and trying to chop down a bunch of trees. You can certainly do it, but there are a lot of unknowns and a lot of trial and error. Franchising, meanwhile, is like going into the forest, but someone has handed you a tool beforehand that has been proven to chop down trees, and they’ve given you guidance on the most effective way to chop down those trees. If opening your own business is betting on yourself, then, becoming a franchisee is betting on yourself with somebody’s help. This help can come in handy at all stages of opening a business, starting with the most fundamental aspect: the concept itself.

Unless you’ve spent years brainstorming ideas for businesses in your spare time, you probably don’t have a stockpile of viable business concepts ready to go the day after you get laid off. And since the clock is ticking and your bank account balance is dwindling, you don’t have unlimited time to come up with ideas.

That’s a checkmark in the “plus” column for franchises. They’ve already come up with business ideas in almost every imaginable area. You can even pick one that aligns with your interests. Do you like landscaping? Do you like fitness? Do you like food? Whatever your interests are, there’s a franchise for that.

After the idea, there’s the small matter of financing. If you have a nest egg of a couple of million dollars, then you’re all set, and you can get your venture off the ground by self-financing the effort.

Related: Looking to Buy a Franchise? Here’s How to Start

If you don’t, you’re going to have to make a trip to the local bank for a loan, and we guarantee that they’re going to want to see a very thorough business plan and lots of other documentation that proves you’ve properly thought things through before they hand over their money to you.

This is another area where franchising provides a powerful advantage. You can walk into the bank with a proven business model under your arm, along with historical data that shows how the concept has performed over a specific period of time. Opening up a 1,000 square foot store in a city with a population of between 200,000 and 300,000 people? You can show what comparable sales have been at other locations that match those criteria.

Part of the benefit of being your own boss is the freedom to call your own shots. That freedom, of course, means the ability to make everything from a brilliant call to a really boneheaded call. Once again, franchises can help out here by providing best practices accumulated over years of successful operation.

Necessity is the mother of invention. While no one ever hopes to be laid off from their job, it does provide an opportunity to pause and rethink the path you’re on and where you’d like to go next. Running your own business, either entirely on your own or by signing on with a franchisor, can be a highly rewarding way to start your next chapter.

By: Danny Cattan and James Vitrano / Entrepreneur Leadership Network Writer

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