If you’ve been laid off or furloughed recently, what to do with your retirement savings is probably the last thing on your mind.
Unemployment rose to a record-high 14.7% in April, the second month of coronavirus-related shutdowns.1 Going through that ordeal while overseeing online learning or helping out high-risk loved ones at home probably doesn’t leave much headspace to consider what comes next for retirement savings.
Let’s make it simple. It’s okay to sort it out later. In fact, it’s often the best choice, because making investment decisions emotionally may lead to regrets. When you’re ready, here are four things you could do with your former employer’s retirement plan:
- Leave your money where it is.
You may want to keep your savings in your former employer’s plan if it has low costs or investments you like. I’ve talked to many successful friends who have never paid attention to the investments their employer chose for them, through what’s sometimes called the “automatic default.”
Now it’s time to look under the hood. Some plans include investments you can’t get through individual retirement accounts, such as fixed annuities that could provide guaranteed lifetime income in retirement. Others include stable-value funds, which don’t have guarantees but generally seek to preserve capital and provide income. And you may want to stay put if the plan’s rules would let you tap your account in a cash crunch to get a hardship withdrawal or a loan—especially with bigger amounts available through the CARES Act. (More on that below.)
Before you count on this choice, make sure the plan will let you stay put. Every plan makes its own rules, and some require a certain minimum savings level to keep the account, or may raise your fees if you no longer work there.
- Move it to an IRA.
If your investments are relatively plain-vanilla and you’re worried about losing track of any workplace accounts you leave behind, consider rolling over your retirement savings into an IRA. It’s a real concern given the number of places we work. Younger baby boomers, for example, have changed jobs 12 times on average from age 18 to 52.2 Keeping up with the statements, let alone making sure the investments inside add up to a smart strategy, might challenge even the best financial planner. Yet understanding how your portfolio is allocated among several different accounts can be key in times of market volatility, as you may need to consider rebalancing your holdings. Having all of your nest egg in one basket could make the job a little easier.
Keep in mind: When you roll over savings from one retirement account to another, it generally goes more smoothly with a “direct transfer”--moving the money directly from one institution to another. If you cash out the account instead, you have to make sure you complete the rollover in 60 days—or you could face taxes on the amount.
- Move it to your new employer’s plan.
When you start your next job, your new employer may let you make a direct transfer from your old plan into the new one. It might be worth the effort if your new plan has low costs and attractive investment choices. Plus, it’s a way to streamline your savings. One other potential advantage: Some employers offer financial advice as part of their offer. Whether you connect by phone, online or in person, working with an advisor could help you align your savings with your goals.
- Cash it out.
Completely cashing out your 401(k) or 403(b) account could cost you. True confessions? I did this the first time I changed jobs, at age 23—even though the HR folks tried hard to stop me. Had I left my paltry savings in place, assuming they earned a lowly 2 percent a year, the account could be worth 10 times its original value by the time I retire. If this example isn’t enough to dissuade you, consider the tax penalties: There’s a potential 10% early withdrawal penalty if you’re under age 59½. And your withdrawal would be subject to income tax. You could also lose out on other benefits, depending on how your account was invested.
Still, many families are facing financial needs they never would have expected. If your emergency savings and unemployment benefits aren’t enough to cover the basics, it may be time to consider using some of your retirement savings. It doesn’t have to be an all-or-nothing choice: You could take a hardship withdrawal from your employer plan or IRA instead of cashing out the account. The CARES Act raised the amount you can withdraw to $100,000 from all of your retirement accounts combined, and it erased the 10% early-withdrawal penalty. (Note: If you are not changing employers but still need money from your employer’s retirement plan, consider a loan instead. That way, you are committed to paying the money back in three years so it can continue to work for your future.)
The good news is that there’s a way to recover down the road. If you find a new job and no longer need the money, you could return the distribution to the account—or to a new employer’s plan—at any point in the next three years. Skeptical? Try to remember how nervous we all were around 2008, during the financial crisis, and how things turned around in a few years’ time. If you experienced any setbacks then, think back to what you wish you had done instead. Maybe you have a true confession of your own, and now is your chance to do things differently.
You may never forget this financial hit, but it doesn’t have to define what happens going forward. In time, there will be ways to get back on the path toward a more secure financial future.