401(k) opt out Company matched funds allocated

Question

Based on the current volatile climate unfavorably forecasting the future of brick and mortar retail stores facing continued lost revenue, the unprecedented growth of eCommerce, and to further damper retail sales the emergence of COVID 19, I was considering the CASH OUT option regarding my company matched 401(k).

The Question is: While still employed with that company can I cash out, or do you have to leave the company? What happens to the funds they matched if I CASH OUT, versus leaving the company? At the end of the day do I take the money and run or take my chances on losing it all if the company ends up closing all its stores taking into account the downsizing has already begun. The boss suggests I just do not pay into my 401(k) anymore, well that is half the answer.

Answer 1

The money in the 401(k) is your money. The solvency of your employer doesn't matter. Where you work doesn't matter, its your money.

A 401k match is a good benefit, your employer increases your pay by some amount to match your 401(k) contribution and puts that money into your 401(k).

If you need money to pay down debt or expect to be unemployed soon you should consider a few points:

• Your employer has to pay for the match, essentially giving you a small raise. They may fire you or lay out off soon, why wouldn't you take more money now while you can get it?
• The 401(k) is still your money. Borrowing from your own 401k is possible, though there are some rules and costs involved (essentially you have to pay yourself back with interest). This can be a second or third tier safety net.
• If your portion of the 401k contribution will make or break your budget for the month or if you are certain you'll need to borrow from your 401k, not making the contribution puts money in your pocket. This means your employer doesn't pay their match and you leave that money on the table.
• yoozer8 has an excellent answer which discusses vesting. If the match from your employer is not fully vested, the money isn't yours yet.

In any case, if you have money in the 401(k) and you change jobs, that money is still yours and you can move it into another 401(k) or an IRA.

Answer 2

You may have a poor economic outlook for the future, but with most 401K plans you can choose your investments. You can sell all your stock and bond funds and move to a cash account or a treasury fund account. Also you can direct future investments into such accounts including your company match.

Doing this you will likely earn a small amount of interest but are likely to lose money when considering inflation. However, some make this choice because it is better then stocks losing far more.

The key thing to remember about 401Ks is there are two components. What your money is invested in today, and where future investments will be deployed. Both of those areas need to be set where you desire.

You can simply "opt out" of a 401K by not contributing anything. However some employers still put in for their employees even if they do not contribute. There seems like genuine fear of you being invested in the market. As a stock holder you have no liability other than your own investment. While investors in companies like Enron may have lost their investment they were not and could not be sued for the company's fraudulent practices.

If you are young down markets, especially in a 401K, are great opportunities to buy. You won't need the money for years and the markets are very likely to recover.

Answer 3

You may be able to "opt out" by not simply contributing, but some portion of your contribution may be mandatory/required. You'll have to check your employer's plan to determine if this is the case.

What happens to your employer's contributions also depends on the plan and whether there is a vesting period. If their contributions vest immediately, then it is your money as soon as it is contributed. If there is a vesting period, then some portion of may be your money, and you may lose some portion of it if you leave the company during the vesting period. Again, you'll have to check with your specific plan.

Whether you lose your money if your employer shuts down depends how you've invested it. If it's invested entirely in shares of your employer's stock, then yes, you would lose it all. If that is your concern, you should diversify your investments.

Answer 4

While still employed with that company can I cash out, or do you have to leave the company?

You generally can't cash out a 401(k) while employed - some employers will allow you to do an "in-service rollover" to an external retirement account (that you could subsequently divest), but it's not common.

And it doesn't matter, because you shouldn't do it anyway.

When you cash out a deferred tax retirement plan like a 401(k) or a traditional IRA, you pay income tax on whatever was withdrawn. If you're under 59 1/2, you'll ALSO pay a 10% penalty. so depending on your federal and state tax brackets you may be paying up to 50% tax on your cashed out funds.

Also, the success of your company has absolutely no bearing on these retirement funds. They are not owned by the company - they are owned by YOU (with some broker as a custodian). If the company ceased to exist tomorrow, those funds would still be held by the broker in your name.

If you think the MARKET is going to crash, then you can choose safer investments, but be aware that over 10+ years the market has always recovered from crashes. If you plan is to get out, wait for it to go down, and get back in, that means that you know 1) when the peak is hit to get out and 2) when the bottom is hit to get back in. Many people think they know on an impending crash, but are wrong. I've been reading questions on this site for 2 years saying "I know the market is going to crash soon" but it has kept going up. Even during a pandemic, the market is back at all-time highs. Those that got out in March missed out on 30-50% gains.