Tom Mosley:

When you leave a job or you get left by a job, you get laid off. What do you do with your 401(k)? That’s what we’re going to talk about on the show today. There are four things you can do basically with your 401(k) when you leave a job or you’re no longer working at a place, first of all, that’s called a dormant 401(k). It’s dead. It’s over. You can’t put new money into it. It’s dead because you’re no longer working there. Well, you might want to leave it there. That’s the number one of four things that you can do. You might want to leave it there. Why would you want to leave it there?

Well, perhaps you’re in a 401(k) that might be making money. That’s a newsflash because not a lot of them are, because there’s very limited amounts of investments that are in a 401(k), and usually they’re target funds, which haven’t been performing very well and other things like that. But you could leave it in the 401(k). A major reason for leaving money in a 401(k) is if you’re under indictment or you’re going to have a lawsuit against you, it is creditor protected, which means the money that’s in your 401(k) nobody can come after it. You might remember the name OJ Simpson. He lost a $33 million suit, and it was against him, but all of his money was in his 401(k) so the ones who won the suit got nothing.

The first thing you can do with your 401(k), if you leave a job and it’s a dormant 401(k) you can just leave it there. The second thing you might want to do with a 401(k) is you can take it with you to a new job. You can move it from the dormant 401(k) into a job where you have a new 401(k), and you can just transfer it over 401(k) to 401(k) that leaves you with creditor protection, but it also leaves you in normally buckets that you really don’t want to be in. Think about your 401(k). I analyzed one recently where there were 24 options, two of them were basically money markets where you’re not going to make much money at all. The other 22 out of 24 options had all lost more than 20%. This was in the year 2022.

So when the market is down, generally everything in a 401(k) is down, there’s no place to run for safety. If you’re 25 years old, that doesn’t matter. But if you’re getting close to retirement, it is very important. So you’ve got to be very careful and notice how limited the options are in 401(k)s, if you do the second option, and that is move your dormant 401(k) into an active 401(k) that you have at a new company.

The third thing you can do with your 401(k) is what almost everyone does, and that is move that 401(k) by a roll over into an IRA. Now what you’re doing is you’re moving from a company plan, a 401(k) to an IRA, an individual retirement plan. Now, the reason people like to do that is man, you’ve opened up all the options in the world there. You can do almost any kind of investment within an IRA. Now, you’ve lost your credit or protection of the 401(k), but you’ve given yourself many, many more options for investments.

And if you think about it, when people leave their office, and if you’re in an office job or you’re working even in a warehouse, you’ve got a desk, you’ve got things on the wall and pictures and things on top of your desk and things in your drawers, you take them all with you. So why would you take all of those things and leave your money in the 401(k) at the old place, or even take it to a new place? Take that to an IRA is what most people see value in, and let’s do something with it where we can really grow it. That’s what most people choose when they’re given those options.

The fourth thing you might want to do is you can cash out your 401(k). Now, that sounds good because you’re maybe unemployed if you’ve been laid off from a job or you’ve decided to stop a job and you could just cash it out. And you’ve got to be careful with that though, because you’ve got to pay full income tax on every penny that comes out of the 401(k). Number two, if you’re under 59 and a half, you’re going to have to pay a 10% penalty in addition to the regular tax for taking it out. So grabbing that as money that you can readily excessively get your hands on to get through the unemployment stage or the layoff stage might seem like the best thing to do, but in essence, it might cost you more than any other thing, and that you’ve got taxes, you’ve got penalties and everything else, so you really need to think about that fourth option.

So when you get laid off or you leave a job, there’s one big issue that oversees everything in this question of, “What to do with your 401(k)? What’s your timing?” If you’re 25 years old, you need to do other things than what I’m going to suggest if you’re 65 years old. This is where you need to get some input from a professional who can help you either at 25 start to build a plan for the rest of your professional life, or at 65, you may need to now use that 401(k) to see if, “Can we retire? Is this the last job I need? Is this a blessing that I got laid off and there’s enough money in my portfolio, my lumber yard, my 401(k) so that I can actually build a retirement plan?”

Now, if you’re in that situation, you might want to look at a video that we’ve done previously. Click the tab right here and it’ll take you to a video and a show we did on, “How do you build a retirement plan?” So what do you do with your 401(k) when you’re no longer working somewhere? Number one, you can leave it there. Number two, you can move it to a new 401(k) if you find another job and you have a 401(k) at that job. Number three, and this is one that most people do, is they move it into an IRA. Number four, if you absolutely have to have the money, it’s your money, you’re going to have to pay income tax on it and a penalty, but you can cash it out and use that money. What decision will you make?

Well, that depends on what we talked about when we talked about your timing. Are you 25? Are you 35? Are you 45? You probably don’t want to cash it out. But if you’re 65, you may be asking that real big question. “Is this a blessing that I got laid off and I’m no longer there, and now I’m in retirement? Can we just afford to retire?” If you need our help, get in touch with us. If you like what you heard on the show today, hit the subscribe button and then you’ll be notified of future shows. As I tell you each week, I’m Tom Mosley, and if you’ll give me eight to 10 minutes, I’ll do my very best to increase your financial knowledge.