Money Rehab with Nicole Lapin - "How Do I Get My 401(k) From an Old Job?"

Episode Date: August 14, 2024

Picture this: you have a job at a company with 401(k) benefits and then... you quit (or the job quits you). The good news is that money is still yours. But the retirement fairy won't just come and leave your 401(k) under your pillow. Nicole outlines the steps you need to take after leaving a job to make sure that your 401(k) is still working for you. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Brokerage services for alternative assets are offered by Dalmore Group, LLC, member FINRA & SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank. Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value.  Brokerage services for Regulation A securities are offered through Dalmore Group, LLC, member FINRA & SIPC. Risks at public.com/disclosures/alts-risk-and-conflict-of-interest-disclosure See public.com/#disclosures-main for more information.

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To get started, visit bofa.com slash newprosmedia. That's B-O-F-A dot com slash N-E-W pros, P-R-O-S, media. Bofa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Everything has a series finale, Bed Bath & Beyond, Succession, and often our jobs. But once the credits roll, we have to answer this question. What happens next? This is what money rehabber Amber wrote in to ask about. Here she is. Hi, Nicole. I recently resigned from my job and don't know what to do with the 401k from my former employer. I'm a single mom and currently unemployed. Do you have any suggestions on what I can do?

Thank you. First of all, Amber, congrats on leaving your job. Weird take, I know. But I'm sure you spent a long time thinking about this decision and you have a very good reason to leave. So good for you for doing what's best for you and your family. A few things could happen next, but ultimately what happens is completely up to you. So let's look at your choices.

Now, you have a couple of things that we need to sort out about your financial situation. Like, do you have $5,000 or less in your 401k? If so, your old job will just automatically close your account, cut you a check, minus the taxes and penalties, and off you go. So if you're doing an eat, pray, love situation, make sure that you have a forwarding address so that your check doesn't get lost in the mail. If you have more than $5,000, let's look at a couple of different things that could happen. If you quickly find a job that offers its own 401k plan, you can just take your old 401k and roll it into your new employer's 401k.

This is something that your HR department there could help you with. It's a pretty simple process. You set it up by setting up your new 401k with your employer. And when you open that account, you tell the new plan manager that you'll be rolling over an old plan. There will probably be a little extra paperwork involved, but it shouldn't be anything terrible. Then you contact your old plan and you tell them that you're doing a rollover and you fill out their paperwork. Okay, here's where things can get a little messy sometimes. Remember, 401ks are pre-tax accounts, meaning that you're taxed on that account not when you contribute, but when you take the money out. So when you roll over your 401k, you do not want it to count as a withdrawal or you'll be taxed and penalized,

and that is bad news. So make sure you tell your old 401k provider that you want to do this as a direct rollover, meaning that the company managing your old 401k sends the money directly to the company managing your new 401k. They might require you to play middleman or woman and then send you the check directly and ask you to deposit it into your new 401k. This won't trigger a withdrawal if you deposit the check into your 401k immediately, but it will trigger all sorts of penalties if you deposit this money into your bank account. So I repeat, this is critical. Do not deposit the money from your old 401k into your bank account. That will screw you over. Any money from your old 401k goes into your new 401k. You do not pass go.

You do not collect $200. Capisce? As a side note, if you love your old 401k for whatever reason, you can leave your money in there. You won't be able to add more money into it, and there may be some extra fees, but it's yours. It's there. You can keep it forever and ever at the end. But Amber, it doesn't necessarily sound like you love your old plan. And for most people, having just one single 401k is a way easier way to manage your retirement. So rolling your old 401k into a new 401k is probably the move.

Okay, here's the second scenario. Say you're leaving your job because you're interested in working for yourself, going freelance or moving to a job that doesn't offer a 401k plan. In that case, you have the option of opening up a rollover IRA. You have to decide which of the two types of plans works best for you, traditional or Roth. And funnily enough, another money rehabber had that very same question just a couple days ago. So if you need a refresher on those options, I've linked that episode in the

show notes. Amber, the final scenario you could be faced with is the prospect of not having any money to live on and needing your 401k money right now for living expenses. This means withdrawing money early and even cashing the entire thing in. This is not something I ever recommend doing. You'll have to pay 20% in taxes and take a 10% hit in penalties. You may be able to make a hardship claim under certain conditions. For example, if you quit your job because of a medical condition and the money is going to pay for your care and medical treatment. Although a hardship claim only knocks off the 10% penalty for early withdrawal, it doesn't do anything about the

20% in taxes you'll owe. This is a scary situation to be in, but if it's where you are now, I promise you'll be able to shake yourself off and get things back on track. You are not the first person, Amber, to withdraw from their 401k early, and you're certainly not going to be the last. I hope this isn't the situation you're in, but if it is, I know it's stressful and I promise it will be okay. And please keep me posted, truly. As you cruise along this road to financial freedom, there's going to be a lot more questions along the way, and my email is always, always open for you. Remember, you're in the driver's seat, but I will always be there for you in the passenger seat with a playlist and snacks, of course. For today's tip, you can take straight to the bank. Being in a position where you're not earning

any income for a few months can definitely suck, but it may also mean that you qualify for tax credits you wouldn't normally be eligible for. For example, as a mom, you can qualify for the earned income tax credit if you make less than $59,000 this year. Anytime you have a big shift in income, make sure you look over your tax credit eligibility very carefully so you don't miss out on any money that should belong to you. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even

have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.