If you’re reading this it’s likely you’ve recently been impacted by the COVID pandemic. You’ve been thrust into a completely unexpected situation and your life has been turned upside down. Some of you may now be faced with determining whether or not you should enroll in COBRA benefits or perhaps look into the healthcare marketplace for coverage. You’re having to navigate through the complexities of enrolling for unemployment and certifying on a weekly basis. This is all happening while you’re taking care of your family and you’re scrambling to find new career opportunities online. I know this because my own family has been impacted by recent events and we’ve gone through this ourselves. Just know that you are not alone and we will all come out of this together.
So once the dust has settled and you’ve managed to set up your new medical benefits and have filed for unemployment, your attention may end up turning to your 401k. There will typically be a waiting period until you you can process distributions from the account should you choose to do so. Before taking action however it’s best to have a clearer understanding of all the options at your disposal. In the following paragraphs I will break down those options and attempt to provide some education around the pros and cons associated with each.
Leaving it in Your Old Plan
Often times simply leaving your plan alone is your best bet. If you have a vested account balance greater than $1,000 you should be able to do this. If you worked within a larger employer chances are good that the costs associated with the plan and the underlying investments are low. By leaving your 401k within your old plan you also give yourself the opportunity to take advantage of backdoor Roth contributions moving forward, should your income allow you to do so.
Some times expenses can actually be quite high within an employer plan however so this is something you should take into consideration. It is always wise to enlist the help of an advisor to ensure whatever investments within your 401k align with your current level of risk tolerance. Given recent volatility in the market you could be asking yourself if you’re truly comfortable taking a more aggressive stance.
Moving it to a New Employer
If you were fortunate enough to have another position already lined up, or you’ve quickly obtained a new opportunity, you may have the ability to rollover your old 401k into a new employer’s plan. If your new employer does have a plan, some of the points made before should influence your decision. Are the costs associated with the new plan higher than your old one? What does the investment menu look like within and are their inexpensive fund options? Consolidation might not be in your best interest if it inevitably means you’ll end up paying more within the new plan through administrative costs passed onto you as the employee.
Perhaps your new employer has a cheaper plan however and it makes sense to do so. This will still keep your ability to perform efficient backdoor Roth contributions intact as the account will remain in what’s called an ERISA qualified plan.
Rolling it over into an IRA
Once you’ve determined your vested amount in the plan and you’re able to process distributions, you’ll have the ability to roll your account into a personal IRA. Pending whether or not you have after-tax amounts within your old plan, this method could require you to establish both a traditional IRA and a Roth IRA. This option presents a number of considerations. Are you going to manage the account yourself or work with an advisor? Will this limit your ability to perform tax-efficient backdoor Roth contributions? Do you have a significant amount of company stock within your old plan, enabling the use of a strategy called Net Unrealized Appreciation?
Having someone else manage your assets could be intriguing because you’ve felt under equipped in the past to perform this task yourself. Be careful however when interviewing potential advisors as there are plenty of people out there ready to recommend strategies unsuited to your desires. When working with a CERTIFIED FINANCIAL PLANNER™ professional, they are acting as fiduciaries and as such, are required to keep your best interests top of mind.
Taking a Cash Distribution
If you’ve ever read another article on 401k rollovers, this option will often be discussed as a last resort and avoided. Typically, any cash distributions taken from a 401k will cause a 10% penalty along with taxation (if pre-tax dollars). You may qualify to take such a distribution without penalty, but you’ll have to meet varying requirements for that to be the case.
Something to note here is that under the recently passed CARES Act, participants may actually be eligible to take up to $100,000 from such an account and not be subject to penalties. Most plans have adopted these new regulations, and in times of need this could actually be a viable option. These new regulations also allow you to spread the tax amount out over a three year period, as well as pay back the amounts withdrawn over that same time frame. I’m certainly not advocating everyone perform this option, but the rules are such that if you’ve been impacted by the pandemic from an employment standpoint, this could be a consideration.
What Now?
Now that you’re armed with some additional information you should be able to make a more informed decision. I’m going to echo an earlier sentiment in that if you’re considering working with an advisor, be sure to interview a few people. Advisors are paid in a variety of ways, and you may find that some structures are more advantageous than others when it comes to establishing such a relationship.
If you’d like a no obligation consultation don’t hesitate to reach out to me as I’d be happy to point you in the right direction, even if that means not working together.
