Almost everyone has, or will at some point, experience a change in jobs (or possibly even a change in career). Sometimes this type of change is completely unplanned and unexpected (when a downsizing in a corporation occurs, for example). At other times, the employee might decide to switch employers, or careers. Either way, this change can be both financially and emotionally disruptive, especially if it isn’t planned and implemented properly. Conversely, with proper planning this could present potential opportunities for improvement in the family’s financial picture and in the workers career. In this article we will explore some of the financial cautions and the potential opportunities that present themselves when dealing with a change in our job.
We’ve all heard the popular expression “cash is king”. During a job change that can be an especially important phrase to keep in mind because cash helps us to preserve flexibility during this period. In the face of a major event like changing jobs or careers we should resist the natural temptation to pay off our existing debt. While it might feel good in the moment to be relieved of our debt payments, if we’ve exhausted our cash we may not have the wherewithal to maintain our other financial obligations. While you may not want to plan an elaborate vacation during this period, you still want to maintain the things that are important to you and your family and you certainly want to continue to pay your debts on schedule. Having an appropriate amount of cash on hand can be vital to maintaining your monthly budget, paying for any potential relocation costs and business search expenditures that may occur during a period of transition. If you haven’t yet set aside this type of emergency reserve, remember, there’s no time like the present. You’ll likely be very happy that you did should you ever find yourself in the middle of a job change.
On to a brighter subject, let’s consider the potential for tax panning that can occur during a job transition. While we might not immediately link a job change to tax planning, if you find yourself unemployed for a number of months you’ll likely be in a lower tax bracket that year. Why not take advantage of that and do some smart tax planning in both your personal and retirement plan accounts. Maybe you have some securities with large capital gains in a personal portfolio and in past years the sale would have resulted in a 20% capital gains tax. With less income, you may be able to sell those securities and reduce the capital gains tax to 15% or even 0% depending on your income for the year. As a side benefit, you can now more fully diversify your portfolio by adding additional securities and asset classes to the mix. For retirement accounts you might consider the possibility of converting some of your IRA money into a Roth IRA. Several years ago there were all sorts of income limits and restrictions that made Roth conversions a bit more complicated. Today, the Roth conversion is a less complex process, but remember, you will owe tax on any amount of IRA money that you convert. If you find yourself in a lower tax bracket, wouldn’t that be an opportune time to consider moving money into a Roth IRA that has the advantage of growing not only tax deferred, but eventually tax free when you begin to take distributions from the Roth IRA account years later.
Lastly, you will likely need to make a decision about what to do with your retirement plan money when you change jobs. You essentially have 4 options:
- You can leave the money in the plan where it is (assuming the former employer allows you to leave it with them, and many times they’ll force you to do something else with it).
- You can move the money into your new employer’s plan (again, assuming they’ll accept that type of transfer). Of course, when you move the funds into the new plan you’ll be restricted to the investment options that are available in that new plan and while that may be just fine, there is, in my opinion, a better option to consider.
- You can establish your own IRA Rollover and move the funds into an account that gives you complete flexibility and allows you to build the portfolio that best matches your unique needs by selecting from the entire universe of investment possibilities that exist. For most of us this option is the most appealing, but remember, you’ll be responsible for maintaining the portfolio and making sure the risk and return levels are in line with your important future financial goals.
- One final option is to cash the funds out and take possession of the money personally. This option comes with several potentially damaging consequences including the loss of tax deferral on that money as well as taxes which will be due and even a 10% premature distribution penalty (if you are under the age of 59 ½ at the time of withdrawal). We would encourage you to avoid this last option if at all possible and focus on the other options that are available to you.
Job change, whether planned or sudden, can be a stressful time, but being prepared can make the entire experience a whole lot easier on you and the people you care about. Take the time to consider whether you’re truly prepared. We help our clients through all facets of their lives by doing the planning up front and that can make it a lot easier to adjust when life throws a curve ball your way.