First Thing You Should Do With a 401(k) After Losing a Job
Signing up for a 401(k) plan with employers is something a vast majority of people take advantage of. Job loss, however, happens more often than, say, 20 years ago and ex-employees dont really know what to do with their 401(k). Theres a lot of conflicting advice out there, so heres a look at a couple of the options you have for that 401(k) and the benefits and drawbacks of each.
Taking a Loan
Taking a loan from a 401(k) has become a popular option for both the employed and unemployed alike. It can seem like an easy choice; after all, theres no need to go through a financial institution, so the process of obtaining these funds is relatively simple, which is a great benefit. There are drawbacks to this approach, though:
- You dont only pay back interest; you have to pay back the full amount.
- If the amount is not paid back in entirety, its a taxable distribution.
- If youre under 59 1/2, theres a ten percent penalty.
Before taking out a loan on your 401(k), consider the ramifications so you can make the choice wisely.
Roll it Over
Almost everyone has heard this term, and almost no one can tell you precisely what it means. Simply put, when you lose your job, you can take all of the money thats in your employer 401(k) and transfer it into an individual retirement account, or IRA. There are some valid reasons for leaving your 401(k) with your ex-employer if youre at least 55 years old, because that allows you to take out penalty-free funds. However, there are major disadvantages otherwise:
- Your employer retains control.
- It costs more than an IRA.
- Investment options are fairly limited.
When you lose your job, dont sit on your 401(k). The sooner you choose the best option for your funds, the better off youll be.