Before you make the decision to move on from your job, review this checklist of important financial considerations. Some involve making sure your personal finances are in order, while others can help you explore all the implications of leaving your current job.
1. Review your current retirement benefits. Check the schedule for your employer’s 401(k) and profit-sharing contributions to see how long you have to work to claim any matched funds. If you’re close to being fully vested (meaning you’re entitled not just to the dollars you contributed but also to the dollars your employer did), it may be worth sticking it out a little longer.
Keep in mind that some plans require that you be employed on the last day of the plan year to get employer contributions for that year, even once you are vested. You may want to wait until after the plan year ends before you terminate employment so you don’t lose those contributions.
2. Make a plan for your employer retirement account. If you have an employer-sponsored retirement plan, such as a 401(k), 403(b), or governmental 457(b), understand your options for your account. You may decide to take your money out and pay the associated taxes. And if you are younger than age 59½, there may be additional tax penalties for early withdrawal.
Another option is to roll over your account into your retirement account at your new employer (if they allow it) or into an individual retirement account (IRA) that you set up.
Some company plans allow you to keep your money in their plan; however, you will continue to be subject to the rules of that plan regarding investment choices, distribution options, and loan availability. If you have any concerns about the future viability of the company you are leaving, you may want to move your money out of that plan into an account that you manage and control.
3. Manage your health insurance. If you don’t already have a new position lined up or if your new employer’s health plan has a waiting period, figure out where you will get coverage to fill the gap.
If your current company has 20 or more full-time employees, you’ll be able to keep your current plan for 18 to 36 months after you stop working under the Consolidated Omnibus Budget Reconciliation Act (COBRA). (The length of time depends on a variety of factors.) You’ll likely have to pay more because you will pay both your share of the premium and what your employer used to pay. If that’s the case, you may want to compare costs to coverage available on the government’s health insurance marketplace.
Another thing to consider is that if you live in a state with a health insurance mandate and you do not purchase coverage, you may have a tax penalty (depending on your income).
4. Spend your flexible spending account (FSA) money. If you put pretax money into FSA to pay for health care or child care, try to spend all the money in the account before you resign because FSAs typically operate on a use-it-or-lose-it basis (though you may be able to extend it with COBRA). In contrast, if you have money in a health savings account (HSA), that money is yours to keep.
5. Consider a group life and disability insurance conversion. If you have life or disability coverage through your employer, you may be able to convert your group policy to an individual policy that you can take with you. Check with the insurer to see if that’s the case. Often you have a short window after your resignation to apply for continued coverage. This can be an especially good option if insurers consider you a risk because of your age or medical condition.
6. Check your employment contract and noncompete agreement. If you signed any legal documents when you were hired, have a labor attorney evaluate their terms and enforceability.
Some contracts may require you to pay back relocation money, education grants, or bonuses if you don’t stay for a certain period. Others include “golden handcuffs” that may indicate you will lose unvested options, restricted stock, deferred compensation, and other benefits upon resignation. Still others may require waiting for a specified length of time before taking a job with a competitor.
7. Check the terms of stock options, restricted stock, or other forms of nonsalary compensation. The vesting schedule is key because you may want to delay your departure if a valuable number of options will vest in the near future. If you’re already vested, find out if you’re still subject to the same trading windows and how much time you have to exercise your vested options once you resign. In many cases, options expire if they aren’t exercised within a certain time frame — typically 90 days after your departure.
Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and legal advisors before taking any action that may have tax or legal consequences and to determine how this information may impact your own situation.
Please keep in mind that rolling over your qualified employer sponsored retirement plan (QRP) assets to an IRA is just one option. You generally have four options for your QRP distribution: Roll over your assets into an individual retirement account (IRA); leave assets in your former QRP, if plan allows; move assets to your new/existing QRP, if plan allows; or take a lump-sum distribution and pay the associated taxes. Each of these options has advantages and disadvantages, and the one that is best depends on your individual circumstances. You should consider features such as investment options, fees and expenses, and services offered. Your Wells Fargo Advisors Financial Advisor can help educate you regarding your choices so you can decide which one makes the most sense for your specific situation. Before you make a decision, read the information provided in this piece to become more informed, and speak with your current retirement plan administrator and tax professional before taking any action. When considering rolling over your assets from a QRP to an IRA, factors that should be considered and compared between QRPs and IRAs include fees and expenses, services offered, investment options, when you no longer owe the 10% additional tax for early distributions, treatment of employer stock, when required minimum distributions begin, and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
This article was written by/for Wells Fargo Advisors and provided courtesy of Whitney McDaniel, CFP®, AAMS® Financial Advisor in Beaufort, SC at 843-524-1114.
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