Career changes can bring many different emotions and things to think about. If you are changing jobs, you may feel some excitement about new prospects and co-workers and your mind is filled with all the details of your new position. If you lose your job, a different set of emotions and thoughts occur, maybe anxiety or anger as you contemplate your next steps. In both cases, people tend to overlook several key financial considerations.
There are a number of good financial steps to take when leaving an employer, either to take a new job or if you have been let go. One of the main financial considerations is what to do with the employer-sponsored retirement plan. You have several options, and it’s a good idea to consult with a financial advisor to determine which is best for your situation. These are your main options:
• Leave the money in the plan.Thisis probably the worst option. Many people forget about these old retirement plans, and if you aren’t managing your investments or at least checking in periodically, your asset allocation can become skewed over time, exposing you to more risk. Or you may even forget that you have these assets!
• Roll your balance over into another retirement plan. If you are changing employers, you may be able to roll the balance from your old retirement plan into your new plan. This can be helpful for consolidating your assets in one account, plus it may provide access to lower-priced investment options and an advisor.
• Roll your balance over into an IRA.Saving in an IRA will probably give you the most investment choices although you may pay higher fees. You may choose to roll your account over into a traditional IRA (you aren’t taxed until you take distributions) or a Roth IRA (you are taxed when you convert the account, but then the balance grows tax free). A financial advisor can help you choose which type of IRA is best for your situation.
• Take distributions from your plan. According to the “Rule of 55,” if you leave or are fired from your job at age 55 or older, you may take distributions from your company’s retirement plan without incurring the 10% penalty for early distributions. This may be a good option for some people but probably not for most. If you are under age 55, then you will pay a 10% penalty in addition to taxes on your distributions.
Leaving a job entails other financial considerations in addition to deciding what to do with your retirement account. Selecting health insurance and budgeting for it is another big decision. If you are not eligible for Medicare, you will need some other form of insurance. This could be COBRA coverage or a plan you purchase independently. Health insurance plans and premiums vary widely, and you may experience sticker shock if you need to start covering this cost entirely from your own wallet.
If you are changing jobs, you also need to think about current and future retirement savings. If you are not yet eligible to contribute to your new employer’s retirement plan, you may want to make contributions to an IRA so you don’t fall behind. In addition, if you typically maximize your retirement contributions, double-check your math when you begin contributing through your new employer. Changing jobs is one of the common reasons people over-contribute to their retirement plan, and you may be penalized by having the excess deferral taxed twice! If you change jobs mid-year, make sure your total contribution for the year is within the contribution limit.
Career transitions can introduce a wide spectrum of hopes and fears and many competing factors can weigh on your mind. Remembering the above financial decisions and taking time to make good choices can give you peace of mind today and also improve your future financial outlook. Good luck!