There have been many changes to our labor market during the COVID-19 pandemic. People have found themselves furloughed, laid off or simply needing to change employers or professions for one reason or another.
When an individual leaves a job that has offered a 401(k) plan, they have several options as to what can be done with their account balance:
- Leave it in the company plan. There can be some advantages to leaving a 401(k) balance in the company plan. Group plans may offer lower investment fees and balances may be protected by creditors. If you have appreciated company stock, there may be a favorable capital gains tax rate on the NUA (Net unrealized appreciation) of employer stock upon distribution after certain qualifying events. RMD's (Required Minimum Distributions) at age 72 do not actually begin until you retire unless the participant is an owner of 5 percent or more of the company.
- Withdraw and pay taxes. A distribution from the 401(k) plan will be considered ordinary income and will be taxable to the participant. Due to the CARES Act, if you have been impacted by COVID-19 a participant can temporarily spread the tax liability over three tax years and if you are under the age of 59 1/2 the early withdrawal penalty will be waived.
- Roll to another company plan. If a participant begins working for a new employer it is possible to roll the balance into the new employers 401(k) plan if the plan accepts rollovers. This consolidation can be a convenient way to track assets as they will be in one place.
- Roll to an IRA (new or existing). This option may give a participant more control and additional investment options such as managed accounts, annuities, and alternative investments. This can give you the opportunity to diversify your portfolio into assets not currently available to you.
Any 401(k) withdrawal or rollover should be considered carefully. There is no one-size fits all answer and each participant will have their own unique set of circumstances, objectives and time horizon.
As always, consult a trusted advisor about specific recommendations based on your individual circumstances. A financial professional can help mitigate risk in your portfolio and identify strong opportunities.
This article was authored by Shannon Benish. Shannon is securities licensed in the states of Kansas and Maryland. She is IAR registered in the state of Kansas.
The content on 30Seconds.com is for informational and entertainment purposes only, and should not be considered financial advice. The opinions or views expressed on 30Seconds.com do not necessarily represent those of 30Seconds or any of its employees, corporate partners or affiliates.
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