What to do with a 401k after leaving a job or getting laid off due to Coronavirus

The Coronavirus has caused the stock market to plummet, shut down many businesses and prompted many Americans to file for unemployment. The increase in jobless claims and market volatility has many Americans worried about the fate of their retirement savings. 

If you’ve lost your job, you’re not alone. Over 25 million Americans have already filed jobless claims. And that number is expected to grow. 

If you’ve been laid off, furloughed or let go from a job like millions of other Americans, your entire financial plan may have changed overnight. For many, the switch to unemployment is becoming a reality in the wake of the coronavirus pandemic. There is a lot of uncertainty about what to do with your 401k after leaving a job or getting laid off due to Coronavirus.

When facing a job loss, it’s important to consider the best decision regarding your financial future. If you had a 401k with your former employer, you’ll need to decide what to do with the funds in the account. There are several options to consider, and each one comes with potential benefits and costs. Here’s what you can do with your 401k after leaving a job or getting furloughed/laid off due to COVID-19.

Leave the Money in Your Retirement Account

It may seem simpler or easier to keep the 401k plan with your former employer. While this is one option of what to do with a 401k after leaving a job or getting laid off/furloughed, you should note that you won’t be able to keep contributing to the plan. You also may not have as much control over how the funds are managed. Leaving your money with your former employer can also make it easy to forget how to access the funds, or that your 401k is still there.

Move the Funds to an IRA or Another 401k Plan

Typically, after leaving a job or getting laid off, people will request to roll over their 401k balance into an individual retirement account. If it is done correctly, a 401k rollover can go a long way to helping deliver peace of mind and a safer, more secure retirement future. The easiest way to roll over your balance is to request a “direct rollover,” where funds are moved directly from your 401k plan to your new IRA account. Since the money is not sent directly to you, this type of rollover is a non-taxable transaction.

Many people think a brokerage account is their only option when setting up a rollover IRA. However, if you have just been laid off due to COVID-19, you should consider a fixed index annuity when securing your retirement future.

Direct Rollover into a Fixed Index Annuity

You can roll over your 401k or a lump sum from a pension into a fixed index annuity without paying taxes. These annuities offer a guaranteed lifetime income plus a death benefit, allowing you to participate in stock market gains without ever putting your principal at risk.

Rolling a 401k’s balance over to a Fixed Index Annuity styled as an IRA is a non-taxable transaction that protects you from two major retirement dangers: market risk and longevity risk. Rolling over some of your retirement savings into an annuity will eventually provide guaranteed, secure lifetime income and can be the answer to several questions and concerns you may have about supporting yourself after you’ve retired.

Many Americans have found themselves on their own to chart out their retirement finances. The big question they face is: How do they do it? One popular option is to use a portion of the funds to purchase an annuity, which will provide you a stream of income like a pension. Unlike traditional IRAs and 401k’s, this income can be structured to build for the rest of your lifetime.

The most obvious advantages of a 401k rollover to a fixed index annuity are principal protection and a guaranteed income stream for life, but there is another advantage as well. Retirees who opt to purchase an income benefit rider with their annuity will lock into a guaranteed rate that they can reap the rewards from later. This advantage is considered to be a form of market protection. Additionally, retirees need only invest 25% of their 401k or $125,000, whichever amount is the lesser of the two. The money invested accrues quickly and the “return of premium” death benefit is highly-appealing to retirees, which allows money to go to the heirs of the retirees.

You’ll get a set amount every month (or quarter or year), so you don’t have to worry about drawing down your nest egg when the stock market is volatile. If you’re considering a 401k rollover to an annuity and want to learn more, contact the experts at DeWitt and Dunn.

Indirect Rollovers

You can also transfer the money through an “indirect rollover.” With an indirect rollover, your employer cuts you a check for your 401k balance and you have 60 days from the date you receive the money to transfer it to another 401k plan or IRA without being taxed.

Learn more about what you need to start your 401k rollover by clicking this link.

CARES Act 401k Withdrawal Updates

If you need funds to help cover costs like a mortgage payment and groceries, you might be considering taking money from your retirement account. Here are the rules for withdrawing cash out of a 401k after being fired due to Coronavirus:

Under the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Americans who are facing financial hardships because of the coronavirus can take an early withdrawal of up to $100,000 from their retirement savings, including 401k’s or individual retirement accounts, without the typical 10% penalty that’s assessed for dipping in early. 

Using 401k funds now to pay for immediate expenses could mean that later, when facing retirement, you may have less money in your nest egg. The funds in the account also won’t be given a chance to grow during the build-up to retirement.

However, income tax for any amount withdrawn is waived if the coronavirus-related distribution is repaid within in three years to the original retirement account or another plan that can accept rollovers. This means if you can if you can put the money back into your retirement account in three years, you won’t be taxed on your withdrawal. If the distribution is not repaid, you will be taxed, but you may choose to include the distribution in your taxable income over a three-year period.

While you might be searching how to cash out a 401k from an old job, remember that while you won’t get dinged with a penalty, you’ll still have to pay income tax on that money. There’s an opportunity cost to using your retirement savings, so you want to be sure that you’ve exhausted all other options first.

What’s Next?

At the end of the day, it’s important to remember that economic downturns like the current one have happened before and markets can bounce back, so don’t panic. If you place your trust in the hands of the financial experts at DeWitt & Dunn, we will work with you to find a solution that helps you feel secure.

We understand the hardships and unique situations that come with retirement planning. This is why we develop a customized financial plan that prepares you for a stable, secure retirement future. If you would like to further discuss what to do with a 401k after leaving a job or getting laid off, please reach out. We are happy to set up an online appointment with you so we can get to know your situation and find the best solution.

Disclosure: For informational and educational purposes only. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor.

Guarantees and benefits are subject to the claims paying ability of the issuing insurance company.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed or indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.

You are encouraged to discuss rolling money from one account to another with your financial advisor/planner, considering any potential fees and/or limitations of investment options.

Guarantees are subject to the claims paying ability of issuing insurance company.