Financial Planning Considerations to Make When Changing Jobs
A recent World Economic Forum survey revealed that 41% of companies expect to downsize their workforces in the next five years due to the rise of artificial intelligence (AI). Notably, organizations such as CNN, Dropbox, and IBM have already announced AI-related job cuts. While this technological shift is expected to create opportunities in areas like big data, fintech, and AI, it underscores the immediate need for financial resilience among displaced workers. You can add to these the recent workforce reductions from the big tech firms, planned reductions at Wall Street firms and the well-publicized DOGE cuts to the Federal workforce.
If you are concerned about the stability of your job moving forward, consider the following financial items that you need to plan for should you unfortunately find yourself on the wrong side of this recent trend. As Chuck mentioned in our investment commentary today, we do not expect that the cuts to the Federal workforce will affect enough workers to have a material impact on the economy. If you are an impacted or potentially impacted Federal employee, however, then knowing this is obviously not going to make you feel any better and we suggest reviewing this Article in addition to the rest of this commentary.
Retirement Plans
Before leaving a job, ensure you do not forget about the benefits provided at your old job. First and foremost is your 401(k). Changing jobs provides the opportunity to rollover your 401(k) to an IRA, offering a wider range of investment options and the ability to continue investing those assets in a tax-deferred manner.
Before rolling over your 401(k), check with your plan administrator to see if you have contributed any after-tax assets to your account. If so, you can roll over the original contribution amounts to a Roth IRA without paying taxes, as long as certain rules are met. Rolling the assets to an IRA without identifying the after-tax assets first means you may end up paying taxes twice on those assets (upon contribution and withdrawal), unless you track your basis, and can complicate future elective Roth conversions you may want to implement down the road for tax planning purposes.
If you are over the age of 55 but not yet 59 ½, you may want to hold off on any IRA Rollovers if you’re not sure what your next move will be and you may be looking for new employment for some time. Known as the “The Rule of 55,” this rule allows workers who leave their job for any reason, including a layoff, to start taking penalty-free distributions from their employer’s retirement plan once they’ve reached age 55, instead of the IRA requirement age of 59 ½. It can be a lifeline for those workers who need cash flow as they look for new employment and don’t have other good alternatives.
If you are over the Required Minimum Distribution (RMD) age (73) and plan on returning to work, you are likely better off rolling your 401(k) assets to your new 401(k) plan once you find employment. Doing so will allow you to avoid taking RMD’s until April 1st in the year after you retire, thus avoiding the additional income tax due on your RMD’s above and beyond the wages you are continuing to earn. To preserve your ability to do this, you can either leave your assets in your former employer’s 401(k) or roll them into a designated IRA Rollover until you have found new employment.
If you own company stock in your 401(k) that you may have purchased a long time ago at a low basis, consider distributing that stock directly to your taxable account instead of an IRA to take advantage of a Net Unrealized Appreciation (NUA) strategy. NUA is the difference in value between the cost basis of your company stock and its market value when you distribute it in kind instead of as cash from a retirement plan as part of a lump-sum distribution. Under the NUA rules, the IRS will tax the share of the employer stock as ordinary income only on the cost basis amount, instead of the full market value like other taxable distributions. The advantage here is planning accordingly to realize the market value and potential future appreciation as capital gains, which are taxed at a lower rate. This is a complex planning concept where both your ACM Wealth Advisor and accountant should be consulted before making this election.
When you do find new employment, ensure you enroll in the new employer’s retirement plan as soon as possible to take full advantage of an employer match, if one is provided. In addition, enrollment in the new plan is an excellent time to review how much you are saving for retirement and increase that amount if your new cash flow allows.
Finally, ensure you designate primary and contingent beneficiaries on your retirement plans. If you are married, federal law states your spouse will be the beneficiary. If you would like assets to go to someone other than your spouse, your spouse is required to sign a waiver approving the change in designation.
Stock Options & Equity Compensation
Aside from any old retirement savings plans, you may have participated in a stock option plan, restricted share plan, or another form of equity compensation plan at your previous employer. When leaving a company, generally those stock options or shares that are unvested will be lost. Those options that are fully vested are still available to you, but the window to exercise them might be accelerate to within 90 days of separation. With severance arrangements, an accelerated vesting may occur for those unvested shares as well. It’s critical to speak with Human Resources as well as your ACM Wealth Advisor to understand your company’s rules and to determine what action needs to be taken.
Health Benefits and Savings Plans
If you have a gap in coverage between employers, make sure you understand the COBRA coverage that is provided for you. You have 60 days from your termination to elect COBRA coverage which continues your current medical coverage at the full cost to you without your former employer contributing to those costs. While not the cheapest option, it ensures your family will have no interruption in the medical coverage they are accustomed to. A qualifying event, like a separation, allows you and your family to maintain coverage for COBRA for up to 18 months. Even though this may be an extra expense, with uncertainty around employment it might be best to elect COBRA to avoid coverage disruption, and take your time looking for cheaper alternatives via the Federal Marketplace at HealthCare.gov.
It’s also important to understand if you had a Flexible Spending Account (FSA) or Health Savings Account (HSA) (or maybe both) you can use those accounts to pay for COBRA. You cannot use an FSA to pay for a Marketplace plan but you can use your HSA. These plans provide tax-advantaged ways to save and pay for healthcare costs and could prove useful if you are concerned about cashflow while looking for future employment, but want to maintain coverage for you and your family.
Insurance
Most companies typically offer some sort of disability and/or life insurance coverage to their workers. While we find these plans generally do not offer adequate protection by themselves, it is important to understand what you may be giving up or getting by changing jobs. For instance, if your previous employer provided a life insurance benefit of 5 times your salary you may want to add a private policy to make up the difference. Your new employer may not offer similar insurance coverage, and term life insurance can be cancelled early most often without significant penalties, if you’re new employer offers a cheaper option.
Also remember to designate appropriate beneficiaries for your life insurance policy.
Moving Out of State
Finally, if your search for a new job is taking you out of state (or your finding major differences in the pay scale you were previously accustomed to), you might observe significant changes to your tax situation. These changes might place you in a higher or lower tax bracket and you should ensure your ACM Wealth Advisor and tax advisor are on the same page so they can adjust their tax planning concepts previously discussed accordingly.
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