Critical Financial Considerations When You Leave a Job

Tips to help you make the most of your retirement savings, stock options, and employee benefits when you leave a job.

Whether you are switching jobs or retiring, you may be faced with several financial decisions when you leave an employer. What will you do with your retirement savings? How will you handle your stock options? How will you replace the life insurance your employer provided? The following tips and considerations are a start to answering these questions, but your best move is to consult your financial advisor for advice tailored to your specific situation.

Retirement Savings.

Although it may be tempting to cash out the savings in your employer’s retirement plan when you leave, that is rarely your best move. Not only will you immediately owe income tax and perhaps a 10% early withdrawal tax penalty on the taxable portion of your withdrawal, you will give up the potential for the withdrawn amount to continue to grow tax-deferred or tax-free.

You can avoid immediate taxation and allow your savings to continue to grow tax-deferred or tax-free by:

1) Leaving your savings in your former employer’s retirement plan
2) Transferring them to your new employer’s plan
3) Transferring them directly to an IRA

And while each of these three options enables taxes to be deferred on your savings for as long as they remain in the account, there are differences among them to consider. For example, IRAs and qualified retirement plans, such as 401(k) plans, have different exceptions to the 10% early withdrawal penalty, which may be a factor if you need access to your savings before age 59½. Your financial advisor can review the differences with you and help you choose the best way to handle your retirement savings.

Employer stock in your 401(k).

If the stock has appreciated greatly in value, you may save a bundle in taxes by transferring it to a taxable investment account.

When you transfer employer stock to a taxable account, its cost basis (the price originally paid for it) will immediately be taxed as ordinary income, but the increase in the stock’s value (known as net unrealized appreciation, or NUA) will be taxed as a long-term capital gain when the stock is eventually sold.

Typically, the tax rate you pay on ordinary income is substantially higher than the rate you pay on long-term gains, so moving your employer stock to a taxable investment account will make at least part of its value eligible for lower tax rates. In contrast, withdrawals from tax-deferred retirement accounts, such as IRAs and 401(k)’s, are taxed solely as ordinary income.

Deciding how to handle your employer stock is a complex decision. Please seek advice from your financial advisor before making a move.

Stock options.

If you have vested stock options, leaving your employer may dramatically shorten the time you have to exercise them. Depending on your employer’s stock plan and the circumstances of your departure, your options may expire on the last day of your employment or perhaps up to 90 days or one year later.

It is a good idea to review the stock option plan and agreement well before your last day on the job so that you have enough time to create and implement a plan for exercising your vested options before they expire.

It is also important to keep in mind that an incentive stock option (ISO) loses its tax benefit if not exercised within 90 days of leaving employment.

Life Insurance.

If you had life insurance through your employer, your coverage will generally end when your employment ends, although you have may the option to convert your coverage to an individual policy or port it into another group policy, generally without answering any health questions. You may also be able to simply purchase a new individual life insurance policy to provide the coverage you need.

With offices in Williston and Rutland Vermont, Copper Leaf Financials’ team of experienced financial planners work with clients to assure that all of the vital components of your financial plan are in order – from estate planning to retirement planning. We can help you put all of the legal documents in place to ensure that everything goes according to your plan. For more information call 802.878.2731.