April 19, 2022
OPPORTUNITIES IN A DOWN MARKET
by Graham Shepherd, CFP®
Among everything else to think about when changing jobs—meeting new coworkers, learning new software, figuring out the commute, etc.—it can be challenging to fully consider the many financial ramifications of your transition that have nothing to do with your new compensation. Retirement plans, equity awards, flex spending account balances, insurance coverage, tax liabilities, and more can be impacted by a job change. It is critical to include these considerations in your decision-making process when offered a new opportunity.
One critical consideration is determining what to do with the assets in your 401(k) or similar retirement plan. Here you have several options:
Roll over to your new employer plan. This approach can be beneficial if you have a higher income and wish to make backdoor Roth conversions of non-deductible contributions.
Leave in the prior employer plan. If your previous employer’s plan has better investment options or lower fees when compared with that of your new employer, it may be of benefit to leave the assets where they are.
Roll over to an IRA. An IRA provides a broad investment selection and can allow you to streamline your retirement assets. Additionally, IRAs allow for professional management.
Take a withdrawal. With few exceptions, withdrawals taken before age 59.5 are subject to a 10% penalty, in addition to income tax.
If you received equity awards from your previous employer such as restricted stock or stock options, it is important to know how much of the award remains unvested, as this portion is usually lost after employment ceases. Also, the expiration dates of granted options are occasionally accelerated after termination, which can either lead to a lost opportunity or, if exercised, an increased tax liability.
If you elected to contribute to a Healthcare Flexible Spending Account with your former employer, you have access to the full amount of your election for the current year regardless of how much you have contributed so far. Additionally, if you leave your job in the middle of the year but have unused funds left in your Healthcare FSA, you can still use the full amount of the election even if you will not be making future contributions. Dependent Care Flexible Spending Accounts are a bit different, however, as you can only be reimbursed for the amount you contributed as of the time you leave employment.
You typically have several options for continuing your health insurance coverage, even if your new employer does not offer it. If your spouse is employed and their company offers health coverage to non-employee spouses and families, you may be able to join their plan. However, it is always worth doing an objective comparison of costs and coverage against your other options. COBRA lets you keep the coverage you had through your previous employer, albeit without the employer-paid portion of any premiums. Most people can elect to continue coverage for up to 18 months under COBRA. Of course, you may also be able to obtain coverage on Healthcare.gov or—if you are at least age 65—via Medicare.
If there will be a gap in employment or your new position will pay less than the one you left, having a lower tax rate for the year opens some tax planning possibilities. With a lower tax bracket, strategies such as accelerating realized gains or converting pre-tax assets into a Roth IRA may yield a significant long-term benefit.
These are just a few of the many factors to keep in mind as you consider making a job change. Your Armor team stands ready to help if you or someone you know would benefit from a holistic review of the impacts of making a transition. Please always feel free to reach out for a meeting!—G. Shepherd
Nothing contained in this post is intended to constitute legal, tax, securities or investment advice, nor an opinion concerning the appropriateness of any investment, nor a solicitation of any type and does not guarantee future results. The information contained in this post should not be acted upon without specific legal, tax and investment advice from a licensed professional. Past results are not indicative of future performance.