I'm unemployed but I have $20,000 in a 401(k) from a previous employer; what should I do with this amount so that it still experiences growth?
I am sorry to hear about your recent job loss, but I am sure a better opportunity will present itself shortly.
There are couple of options you can explore that will allow you to keep the monies invested and allow you to continue the growth of the account:
1) You can leave the funds in the 401(k), assuming the plan does not have any provisions requiring you to take the monies out. Typically, employers may warrrant 401(k)'s with balances under $10,000 (or some similiarly low amount) distribute their funds out of the plan. Being that your account is $20,000 I would imagine that is high enought that you would not need to be concerned and could keep the funds in the plan and continue to manage it as you did while you were employed. The only difference now, you will not have contributions going into the plan.
2) You can perform a direct rollover from the 401(k) plan into your personal IRA account. You can always set up a new IRA if you do not have one already. You will want to make sure that you have the current provider make the check payable directly to the new provider for your benefit so that it is considered a direct rollover and not a distribution where they will automatically withhold 20% for federal tax purposes and that may cause you additional issues.
You will want to do an analysis of the pro's and cons of options one and two to see what makes the most sense for you. Typically some benefits of option 1 would be: lower costs, the opportunity to roll these monies to your new employer when you are employed again, online access. Options that would be obtained through option two would be: control of the investments, the opportunity to invest in vitually anything you want, the ability to get professional advice and guidance.
Many times when weighing the benefits/disadvantages of options one and two, option two will prevail. You may want to consult with your fiduciary advisor and see what makes the most sense for you. Whatever direction you decide to go on, we wish you the best of luck in this process and finding your next employer.
You have 3 options when it comes to deciding what to do with an old 401(k).
1) Cash out: This would not be the option to choose based on your scenario, and in most cases is the last option you would choose. There's a 10% penalty associated with early withdrawals in addition to income tax.
2) Leave your 401(k): You can leave the 401(k) with your old employer. Reasons for doing so would be you like the investment options and the plan has low fee's relative to what you'd pay at your new employer or by opening an IRA. In most cases, this isn't a great option because people tend to lose sight of these accounts. The asset allocation tends to "run wild" over time if you're not remembering to review it. Consolidating 401(k)'s is typically a better option because it's less time to consume to manage multiple.
3) Roll into an IRA: If you're managing the IRA yourself, the fee's will most likely be less than what you're being charged in your 401(k) (administrative and recordkeeping costs + expense ratio of investments). An IRA also has much much more investment options. In the 401(k) you're limited to typically 15-30 fund choices. An IRA allows you to invest in the entire universe of investment options (stocks, bonds, ETF's, index funds, mutual funds, etc).
You can also choose to roll over the old 401(k) to your new employer's plan, provided they have a 401(k) as well. Again, it would come down to investment choices, fees and ease of management. Here's a short video explaining the options.
I mean you could leave it in the 401(k) where it is or roll it into an IRA in your own name. I'd likely move it to an IRA in your own name to give you more control and flexibility. That said there are no short cuts when it comes to investing. If you want your dollars to experience more long term growth you allocate them to riskier yet historically higher return sectors like Stocks both domestically and internationally. No one knows what the short term will bring, but a fairly diversified stock portfolio seems logical. Almost every institution, financial planner, or fund company can open up an IRA. It is just a matter of who you feel is best aligned with your objectives as to where to inevitably place those funds.
Once you leave an employer where you held a 401k or other sponsored retirement plan, you have the ability to initiate a rollover into an individual retirement account, commonly known as an IRA. There is always an advantage to do this when able, as you then can select your own custom investments instead of the high-cost mutual funds most 401k plans permit you to use. In addition, if you gain new employment elsewhere that has a plan for employees, you may roll your old plan into your new one. There are still greater benefits to roll it into your own IRA instead of the new company plan, but for most, its a matter of preference. If you did not wish to worry about the separate accounts and investments, perhaps consolidation into the new companies plan would be better. Ultimately, the choice is yours.
David Michael Howard
Independent Financial Advisor, TD Ameritrade
Sorry to read about your job loss. I hope the right opportunity opens up soon.
First, I'd recommend (in almost all situations) that you roll the 401k money into a traditional IRA at Vanguard (or another low cost provider). This will allow for more, possibly less expensive, investment options than you find in most 401k plans. If you have other savings to provide cash for your expenses, then I'd recommend investing the $20,000 in low cost index funds allocated to suit your timeframe and risk tolerance. If you're concerned that you'll need a portion of the $20,000 for living expenses until you find a new job, you can't take the risk of a market downturn and with it a loss of principle. Therefore, I'd recommend parking it in a money market account until you start a new job. Yes, the return is miserable, but the risk of loss is eliminated, which is more important in your current situation. Once you find a job then invest the money as discussed above.
If your income for 2018 ends up being lower than normal due to the period of unemployment, you may want to consider converting the $20,000 (in part or in whole) to a Roth IRA later this year. You may find yourself in an unusually low tax bracket this year, so it may make sense to convert it. Of course, wait until later this year to make that decision.
Best of luck and I hope you find a great job soon!