How to Handle Your Retirement Account When You’re Out of Work
It’s difficult enough to handle being unemployed without worrying about your 401(k). What do you do with your retirement account in the meantime? Should you leave it alone? Withdraw the money and deal with the penalty? Retirement accounts are an extremely important part of personal finance. Knowing how to handle your 401(k) when you don’t have a job is tricky, but necessary.
A lot of people don’t know enough about 401(k) rollovers. When you leave a job, you should immediately rollover your employer’s retirement plan to an individual retirement plan. When you leave your retirement account with an ex-employer, they have complete control over it. If you need to make changes, it’s much easier to do so when the plan is 100% yours. Plus, employer 401(k) plans often have limited investment options, which may no longer benefit you the best they can when you’re unemployed.
It can be extremely tempting to make a withdrawal, especially if you’re out of work and struggling financially. However, there’s a big price to pay, literally. If you’re under the age of 59 and a half, you’ll have to pay a 10% early withdrawal penalty. Plus, you’ll have to pay tax on the amount you withdraw. You really should never withdraw from your 401(k) early. If you think you’re struggling now, you’ll be in worse shape during retirement if you take out your money before it’s time.
There are a few ways to avoid that 10% penalty fee. For example, if you withdraw the money because a participant has a disability, you may not be charged the fee. You may also be able to claim the withdrawal as a medical expense. While there are a few loopholes as well as unexpected circumstances that require you to use that money, it’s always better to look for funding elsewhere.
Being unemployed isn’t ideal, but for the time being, it will put you in a lower tax bracket. You won’t be making as much as you’re used to, but you won’t have to spend as much on taxes, either. When you misuse your retirement plan, you not only have to pay higher taxes, but you seriously screw up your future. Your 401(k) is there for your benefit, but let your future self get all the gains.