A reader recently approached me asking about what to do when he transitioned jobs. Frankly, I had no idea. After reaching out to some more knowledgable than I, Jason taught me a lot, so here he is, sharing his wealth of knowledge with you! Thanks Jason for joining us!
Life transitions are stressful.
When going through any life transition, there is one area that often always adds to the stress: money.
Financial topics are often silent contributors to stress. That is, many people tend to ignore financial topics in the heat of a transition. Rather than taking time to evaluate and plan ahead of time, they wind up taking action retroactively instead.
I’ve seen this play out for people most when it comes to retirement plans, such as a 401(k), they have at work. People often seek my assistance months after they’ve made a decision – hoping I can wave a magic wand to save them from the likes of Uncle Sam and such.
Whether your life is changing due to new employment, relocation, marriage, or divorce, it’s important to consider the financial (and tax) aspects of your current and projected future situation.
It’s critical that you make this a priority and as soon as possible – preferably prior to the actual transition taking place.
While there are numerous topics to consider, for our purposes here, let’s focus our attention on employment transitions. Specifically, what to do with your employer-sponsored retirement plan (e.g., 401k, 403b, TSP, etc.) in the case of an employment change.
Where do I begin?
What should I do with my retirement plan?
These are two very common and important questions.
Following are some of the top questions you should consider and answer when evaluating your 401(k) (or similar) retirement plan. To the extent possible, you should do this prior to your employment transition.
1) How “good” is your current plan?
I know, “good” is a subjective term. I’m not referring only to past investment performance here. Instead, a primary thing to consider is how beneficial (or not) would it be for you to remain in the plan, if possible, even after changing employers.
Often, plans will require you to move money out of the plan upon separating from employment. This isn’t always the case though. One example is the government Thrift Savings Plan (TSP) for U.S. government employees and military members.
If your plan does allow you to keep your funds in place, consider the investment options within the plan. In doing so, you’ll definitely want to answer the next question.
2) How much do the investment funds cost?
Investment funds have an expense ratio. Simply put, this is what it costs you, as the investor, to invest in the particular fund.
This cost should be as low as possible.
A higher cost doesn’t necessarily mean a better performing or superior fund.
You don’t get a bill for this expense. It’s factored internally and many people are often unaware of this cost.
It’s extremely important to keep investment expenses low.
Be very mindful of costs, expenses, fees, etc..
The average low-cost fund expense ratio should be about 0.20%. If you’re paying more than that, you should have a definite reason why.
Employer-sponsored retirement plans have improved in recent years. However, it’s still common to see high-fee funds within these plans.
Note that I’m not implying low-cost funds are always superior to higher cost funds. My point here is that you should take time to understand the costs and become comfortable with them.
Know the costs and know your options. Don’t pay more than you have to in order to meet your investment goals.
3) Do you need cash, right now?
An employment change often shines light on areas requiring extra cash. Some that come to mind quickly are: relocation expenses, clothing, and out-of-pocket training/travel costs.
Aside from the employment-related areas, you may simply need or just want cash available right now.
Often, people make the mistake of cashing out their employer-sponsored retirement plan – whether they truly require cash or not.
Doing this is never a good choice.
This becomes the go-to choice for most, because it’s simple, and other than the tax aspects, easily understood..
Be aware that there may be significant tax penalties to this approach. Not to mention, you lose out on the the reason the money was in the plan in the first place: building wealth.
If you have the time, it’s best to plan ahead for your transition. Planning ahead three, six or even a full twelve months prior to your transition will help ensure you maximize financial opportunities and reduce, or even eliminate, tax problems.
4) Does your current plan require funds to be moved out upon separation from service?
If the funds within the plan are good and meet your needs, you may wish to leave them there. This is especially true if the plan is superior (cost, or otherwise) to what you could find elsewhere.
Be careful of any investment advisers who recommend rolling funds into an IRA they manage.
Professional IRA management isn’t bad or evil. However, it’s important to fully understand how the particular adviser is being compensated. Also, strongly consider whether rolling funds over truly equates to a benefit to you.
5) What’s your new employer retirement plan like? Does it allow for rollovers from other plans?
If your new employer-sponsored plan allows rollovers into it from other plans, it’s very important to evaluate each of the plans together. It’s possible that one plan has better investment options available than the other.
If this turns out to not be the case, at least you’ll know and can rest assured that you made a strong, beneficial decision, and evaluated your options thoroughly.
6) Do you currently have an Individual Retirement Account (IRA)? If so, is it managed by an adviser?
It’s quite easy to open an IRA these days. In fact, there are plenty of institutions out there which allow you to open an account online. This is fine if you’re the DIY type and prefer to manage your money on your own.
But what if you don’t, or if your time could simply be better applied elsewhere?
You may wish to work with an adviser. However, before resorting to an adviser who is focused more on your retirement accounts (and the fees he can charge) than on you, first consider what you want and need in an advisory relationship.
Over the years, I’ve found the majority of people don’t fully grasp what financial planning is all about. Investing is a piece of the equation, but it’s certainly not the only piece. Some advisers will claim to provide free financial planning services. I think this is quite misleading.
Be comfortable with the fact that there is no such thing as a free lunch. If an adviser seemingly indicates his/her services are free or otherwise can’t quite articulate what costs are involved, I recommend looking elsewhere for advice.
A fee-only financial adviser is compensated by a fee – paid directly by you – the client. You can find more about this at NAPFA.org and xyplanningnet
7) What about taxes?
“In this world nothing can be said to be certain, except death and taxes.” ~Benjamin Franklin
Franklin’s quote is spot on.
When it comes to your retirement accounts, know that they exist primarily to provide you with better overall tax treatment of money you save. This means that, depending on the plan type, you could greatly reduce your tax bills – now or in the future – simply by contributing.
You could also find yourself with unexpected tax bills as a result of inadequate planning. Focus heavily to make decisions based upon fact as opposed to emotion.
I’m more than happy to provide you with more guidance here. For now, I’d like to reiterate how important it is to think proactively about your retirement accounts (among other things), when in transition.
Financial planning is about YOU!
I’m sure you’re well aware that there exists plenty of content on the topic of personal finance – this post included.
It can all be confusing and even overwhelming – especially when dealing with the added stress of an employment (or other transition).
Financial planning is about YOU and uncovering the best course of action for your particular situation. Working with a competent financial planning professional ensures you receive the objective and timely advice you require to make sound decisions.
I believe there are still a lot of wolves out there – in sheep’s clothing. I see it far too often in the world of employer retirement plans and IRA’s.
Be mindful. Be proactive. Fully understand your situation and make decisions accordingly.
Jason Reiman is a CERTIFIED FINANCIAL PLANNER™ professional and founder of Get Financially Fit, in Arizona. He’s often found quoted in publications such as Forbes, U.S. News & World Report, Money Magazine, and others.
Jason loves working with fellow military veterans and their families, as well as with those who enjoy physical fitness as much as he does.
Emilie is an Army Wife, Data Engineer, and CrossFitter with a love for working through her thoughts in this space on the internet. She lives with her husband Casey and their pup Bo in Savannah, GA.