Clarks Plan For Financial Triage
Drawing down money from your 401 is a choice that shouldnt be taken lightly. But it might be a necessary step if youre unemployed and unable to find work for a period of time.
If youre going to take this drastic measure, you need to have a firm plan in place about how youre going to spend the money.
Clark has a formula for determining which bills get paid when you have limited money. In short, his financial triage system helps you prioritize expenses related to:
Keep Tabs On The Old 401
If you decide to leave an account with a former employer, keep up with both the account and the company. People change jobs a lot more than they used to, says Peggy Cabaniss, retired co-founder of HC Financial Advisors in Lafayette, California. So, its easy to have this string of accounts out there in never-never land.
Cabaniss recalls one client who left an account behind after a job change. Fifteen years later, the company had gone bankrupt. While the account was protected and the money still intact, getting the required company officials and fund custodians to sign off on moving it was a protracted paperwork nightmare, she says.
When people leave this stuff behind, the biggest problem is that its not consolidated or watched, says Cabaniss.
If you do leave an account with a former employer, keep reading your statements, keep up with the paperwork related to your account, keep an eye on the companys performance and be sure to keep your address current with the 401 plan sponsor.
Keeping on top of how the plan is performing is important, as you may later decide to do something different with your hard-earned money.
You Can No Longer Take 401 Loans
Once you leave the employer, you can no longer borrow a 401 loan against your retirement savings, since there is no assurance you will pay. Usually, 401 loan payments are deducted automatically from your paycheck, and the paychecks stop when you leave. Therefore, if you were to get a 401 loan as a former employee, you will be solely responsible for making loan payments. This increases the risk of default.
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What Is A 401
A 401 is a type of retirement plan that employers provide for their employees. You contribute to the 401 account monthly up to a particular limit. The amount the employees contribute to the 401 account is limited to a maximum of $19,500 for the 2020-2021 fiscal year. For employees who are aged 50 and above, they are allowed to invest $6,500 more as “catch-up contributions.”
Generally, all 401 contributions are profit-sharing plans. For this reason, employer contributions are capped by the 25% deductibility limit. However, salary deferrals are free from this limit. Over the past few decades, the 401 retirement plan has gained popularity among employers and employees alike. It is a qualified retirement plan where employees contribute part of their wages and choose whether it should be pre-taxed or taxed upon withdrawal.
An employee can also choose Roth 401, where the employer funds the investment account with after-tax money . This plan is ideal for those who are likely to pay more taxes in retirement. No tax will be levied when you withdraw from a Roth 401.
How Do I Get A 401 Loan
Not all, but most employer-sponsored 401 plans allow their participants to take out 401 loans. It is an excellent way for employees to tap into their retirement funds without paying income taxes and early withdrawal penalties.
If your 401 plan utilizes an online portal to do the operations of its accounts, you can apply for a 401 loan from there. This option usually is the quickest as it doesnât have to go through a person to facilitate the loan process. From application to approval, it can take anywhere from a couple of business days up to a week.
401 plans that donât have an online presence can still offer 401 loans. Youâll need to contact your planâs administrator or human resource department and complete an application form. This process may take a little more time since a person will need to review your documentation and grant an approval.
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Leave The Money In Your Old 401 Account
This sounds simple, but unless your old plan is extraordinary, its probably best not to use this option.
- First, your former employer probably doesnt want to deal with the hassles and expenses of administering your account. They may pass more costs on to you, which erode your real returns.
- Second, you may find it more challenging to get help when you need it.
- Third, you will not be able to borrow against your 401 balances. This is not necessarily a bad thing, but it does leave you with less flexibility .
- Lastly, this will be one additional account that youll have to track and manage. And you wont even be able to make new contributions to the account to make its management worthwhile.
Also note that if your balance is below a certain threshold and you do nothing, your employer may close your account and send you a check. This will put you in a situation similar to the Cashing Out option below. Try to avoid this, since it will give you much less time to react.
Check Your Health Insurance Options
Consider:
- A spouse/partner plan. Youll likely need to sign up within 30 days of your last day.
- COBRA continuation coverage. This allows you and your family to continue health insurance for up to 18 months. Because you pay the full premium and an employer no longer covers part of the cost, COBRA can be pricey. If you have dental and/or vision insurance in your old job, thats included, too.
- Health Insurance Marketplace plans. Availability varies from state-to-state. Depending on your household income, it could cost less than COBRA. Visit healthcare.gov to learn more.
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Heres What Happens To Your 403 If You Get Fired
Usually: nothing. Unless your account is very small, the plan may not be able to force you to take the funds. But that doesnt mean you should leave your old 403 where it is.
Your contributions to your 403 cant be taken away or forfeited. Contributions to your 403 made by your employer may be subject to vesting requirements.
In this case, any money that isnt vested as of the date you were fired or laid off is no longer yours. Funds that you are 100% vested in will stay in your account and can be rolled over to an IRA, transferred, or converted to a Roth IRA.
Review Health Savings Account Funds And Your Flexible Spending Account Balance
If you enroll in a high-deductible health plan at your next job, you can often transfer an HSA balance. If you dont, you can generally leave any remaining funds and use as needed for future eligible health care expenses.
If you use HSA funds for unapproved expenses, there are tax implications.
Your company will have their own benefit rules and deadlines for your FSA. If you have a balance, what you dont use, you lose, so shop for FSA-eligible items. Submit claims for dependent care or health care expenses through your termination date so you can be reimbursed.
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Look Into Your Cobra Rights
If you work for a company with at least 20 employees, you may be able to continue your group health insurance for up to 18 months after being laid off, thanks to the Consolidated Omnibus Budget Reconciliation Act of 1986. Many states have mandated an extension of the federal provision. For instance, California allows you to continue coverage for an additional 18 months.
You will likely be responsible for paying the entire cost of the plan plus 2 percent, so be sure to do a cost comparison with other plans.
Check Your Vested Balance
If youve only been with your employer for a few years youll notice that the amount you transfer could be substantially less than the amount you have in your account.
Thats because of the matching contributions your mad to your account. You have to work for your employer for a defined period of time to be able to keep any matching contributions. If you leave before that time, you have to give back all or a portion of the matching funds they have contributed. Your vested balance is the amount of your 403 that you get to keep if you quit.
Your unvested balance will go back to your employer when you quit whether you leave your 403 there, transfer it to your new employer, or withdraw it.
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You Have Options But Some May Be Better Than Others
After you leave your job, there are several options for your 401. You may be able to leave your account where it is. Alternatively, you may roll over the money from the old 401 into either your new employers plan or an individual retirement account . You can also take out some or all of the money, but there can be serious tax consequences.
Make sure to understand the particulars of the options available to you before deciding which route to take.
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You Can Roll It Over To A New Employers Plan
If youre starting a new job, you can roll over your 401k money directly into your new employers retirement plan, in most cases. Thats something to ask about during the onboarding process. You should also ask if your new company will match any of your rollover. If youre lucky, youll get even more money out of your job change.
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Three Ways To Take Your 401 Funds
You need a reason to take the funds out of your 401, which is called a triggering event. A lot of people dont realize a triggering event is a must to touch the funds within your 401. After all, the money belongs to you, as should the decision of what to do with it, right? But this is how the government incentivizes all of us to save for retirement.
There are three ways that you can take your funds out of your 401 plan:
After being laid off, I have a few options on what to do with the funds in the current 401 plan. I could leave the money where it is, which gives me little control over what investments are made. This would involve opening an account with the entity that currently holds the plan, and I would not have a say in what specific stocks were purchased with my money.
The beauty of a 401 plan is that its portable- in other words, I wont lose the money when I leave my job. I can simply roll the funds over to an IRA or even a Solo 401 . As a result, I could rollover the money to the plan at a new job that has a 401 plan and be at the mercy of both the job market and a new plan, where I would still have very little say.
The money could be moved into a traditional IRA or Roth IRA where a custodian handles investments for my decisions and theres still a middleman involved.
What To Do With A 401k After Leaving A Job Or Getting Laid Off Due To Coronavirus
The Coronavirus has caused the stock market to plummet, shut down many businesses and prompted many Americans to file for unemployment. The increase in jobless claims and market volatility has many Americans worried about the fate of their retirement savings.
If youve lost your job, youre not alone. Over 25 million Americans have already filed jobless claims. And that number is expected to grow.
If youve been laid off, furloughed or let go from a job like millions of other Americans, your entire financial plan may have changed overnight. For many, the switch to unemployment is becoming a reality in the wake of the coronavirus pandemic. There is a lot of uncertainty about what to do with your 401k after leaving a job or getting laid off due to Coronavirus.
When facing a job loss, its important to consider the best decision regarding your financial future. If you had a 401k with your former employer, youll need to decide what to do with the funds in the account. There are several options to consider, and each one comes with potential benefits and costs. Heres what you can do with your 401k after leaving a job or getting furloughed/laid off due to COVID-19.
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You Can Roll It Over To A New Ira
If you leave your old job and dont know when youll be starting a new one yet, and you also dont want to leave your 401k with your old employer, you can roll the money over into a new IRA. You can use any financial institution you choose for this. Make sure that your old employer does a direct rollover, signing your money over to the IRA management company, rather than to you, so you can avoid paying the 20% in taxes.
Unemployment And 401 Withdrawal
Related
If you have lost your job, you gain access to the money in your 401. However, you should only use this money as a last resort. A 401 withdrawal could result in taxes and penalties. In addition, this withdrawal might prevent you from getting government assistance while you’re unemployed.
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Resist The Temptation To Cash Out Your Retirement Savings If You Are Fired Or Laid Off From A Job If You Have A 401k Roll Your Money To A New Plan So You Can Continue To Contribute And Grow Your Savings
Losing a job is a stressful experience. Adding to that stress is the decision youll have to make about what to do with your 401. The good news is that retirement plans are portable. That means you can take your nest egg with you when you leave a job. Lets look at the options available to you:
Transfer to your new companys plan. When you start a new job, you can move the money from your previous employer to your new employers retirement savings plan . Not all plans accept rollovers, so youll need to check with your new employer.
Roll over your old plan to an IRA. You can move your retirement savings from a previous employer to an IRA without paying taxes or penalties. If you roll your money over to an IRA, you can continue to save for retirement while you look for new employment or start working for yourself.
Icon is an IRA and accepts rollovers. You need to first open an Icon account and then we can help you with the process of rolling over your funds.
Dont cash out. Whatever you do, dont cash out your savings, even if you think its a small amount. Not only will you have to pay taxes and an extra 10% early withdrawal penalty, but youll also lose out on your future savings.
Review Your Severance Package
Although this is not always the case, many times when someone is laid off, they will be extended a severance package with various benefits from their previous employer. When reviewing the package, be sure to look at all the benefits and pay being offered to you. This includes, but is not limited to:
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How are severance payments made to you, and for how long ?
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Do you get to keep your health insurance, and for how long?
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Can you keep your employer group life insurance? Do you need this insurance? Is the insurance expensive?
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What are your options with your 401k?
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Do you become fully vested in your 401k, if not already?
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What happens to any unvested, or vested stock options?
There may be a lot to go through with a severance package, and it’s important to get the details right. There may be lurking issues that you may be unaware of if you’re not being careful. Every severance package is going to be different, and it’s often a good idea to enlist the help of a qualified financial advisor to help walk through and determine what benefits you may need, which you may not, and how it all works together.
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Can I Take Early 401 Distributions
The IRS will allow you to take penalty-free early distributions for specific reasons, these reasons are known as exceptions. One major exception the IRS allows is using 401 money to pay medical bills that exceed 7.5 percent of your income for the year. You also can take out your 401 money penalty-free if you needed to stop working because of a permanent disability. Lastly, if you die, your heirs can take out your 401 money penalty-free. Unfortunately, if you want to use your 401 account for anything else while unemployed, you’ll need to pay the 10 percent penalty.
You will want to weigh the benefits and drawbacks of taking money out of your 401. Often, the better consideration is borrowing against your 401 if you need the money. Many people do not know this option exists and they end up paying substantial penalties and taxes on early distributions. Retirement distributions are considered to be income by the IRS and will be taxed at your regular rate of taxation. The combination of penalty and tax can make a seemingly simple distribution a truly costly endeavor when compared to a loan.
