Ever wondered what happens to your 401(k) funds when you get laid off? Since that’s the question I have right now, come join me on the journey.
For almost 12 years I worked for a Fortune 500 company that had standard benefits, and I took advantage of their offerings. I participated in their 401(k) program and maxed out the company’s matching amount to take advantage of the offer of free money. And a lot of things have changed over the course of 12 years. I was married, became a mom (twice!), rented apartments, bought a home. And as I grew up, I wanted my money to grow with me, and wanted it to make an impact in areas I thought were important.
Getting laid off was not part of my plan, but I was able to see it coming, and I organized things as best I could. But I realized I hadn’t really thought about my 401(k) plan and what I wanted to do with it after the company moved my department to a less expensive area of the country.
So, what happens to my 401(k)?
There are quite a few options available for what to do when you get let go, so let’s take a look.
Three Ways to Take Your 401(k) Funds
You need a reason to take the funds out of your 401(k), which is called a “triggering event.” A lot of people don’t realize a triggering event is a must to touch the funds within your 401(k). 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(k) plan:
- Be over age 59 ½ (retirement age)
- The company terminates the 401(k) plan
- You leave your job (or you are let go)
After being laid off, I have a few options on what to do with the funds in the current 401(k) 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(k) plan is that it’s “portable”- in other words, I won’t lose the money when I leave my job. I can simply roll the funds over to an IRA or even a Solo 401(k) (more about that later). As a result, I could rollover the money to the plan at a new job that has a 401(k) plan (but where I still wouldn’t have much control) 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 there’s still a middleman involved.
The Solo 401(k) Plan
As someone with a successful side business, I could establish a Solo 401(k), which would allow me to have a lot more control over my money by letting me decide where to invest it. A Solo 401(k) has the same attractive features of a 401(k) qualified plan, and it’s easy and cost-efficient to administer. the Solo 401(k) comes with additional features you won’t find in a 401(k), such as the Solo 401(k) loan, which can come in handy if you’re like me and have your own side business. The Solo 401(k) loan is tax and penalty-free, so you can use the funds if you need additional capital to support your business.
The Journey Begins
Being let go from a job I had for over a decade has been an interesting experience and I’ve learned a lot about the company I left, myself, and my money. As a mother, I want to make the best choices for my children and the world they will inherit. It matters a great deal that the investments I make support causes I support, and the best way to do that is to make sure I can have full say over where my money goes.
As I look ahead to new challenges and responsibilities, I am excited for the chance to make my wealth work for me.