Mostly gone are the days where someone spends their entire career working for one company. Talented executives have become “free agents” and can transition between companies as needed. When planned, these job transitions can be an exciting time.
Sometimes factors beyond our control force us to endure an unplanned job transition. This can add stress, usually at the worst possible time, as a variety of decisions need to be made. If you are in this situation and find yourself asking “What do I do now?”, below is a checklist that can help with some of the common financial decisions that should be addressed:
Depending on the circumstances surrounding your job severance, you may receive a “package” to assist in the transition. In this case, it is crucial to plan for current and future tax liability and to properly position assets for near-term cash needs. This could provide an opportunity to maximize your other employer-sponsored plans with a portion of these dollars.
401(k) and Pre-Tax Retirement Plans
You will generally be eligible to bring your retirement accounts with you when you sever your employment relationship. It‘s tempting to consolidate your pre-tax assets into an individual retirement account (IRA) for ease and flexibility of management, but this is not always the optimal choice. Your age, financial planning strategies, amount of assets held in the plan, and cash flow needs, may favor alternatives such as direct distribution, net unrealized appreciation (NUA), rolling to a new employer’s plan, annuity payout options, or just leaving the funds in place until a future date. Consider the pros and cons of the options available to you.
Executive Benefits, Deferred Compensation, and Stock Rewards
Severance may put you in a position where large portions of previously rewarded benefits are vesting in the same year. Also, deferred compensation payout schedules can usually be changed prior to retirement, therefore aligning the payout timing with anticipated needs can drastically improve tax liability. These items require careful planning for tax exposure, as well as for the mitigation of concentrated stock positions. Acceleration of charitable giving, section 83(b) elections, tax-loss harvesting, and other planning strategies may also be available to significantly reduce overall tax exposure.
Are you eligible for employer-paid or subsidized coverage during your transition? Depending on your age, options to evaluate include COBRA, any available new employer plans, the individual insurance marketplace, or Medicare. Other considerations when determining the best route forward are pre-existing conditions, age and number of dependents, and cash flow needs.
If you are like many, you selected the employer-paid life insurance or group insurance plans that were provided through your employment. Now that severance is taking place, it is very important to determine your current insurance needs. It is smart to compare your current coverage with available insurance market offerings to ensure the appropriate protection remains in place.
A transition is a change and with change comes decisions. These are just a few considerations to make when going through a job transition whether it is retirement or just another stop along the way. If you are looking for resources to help with these decisions, please do not hesitate to contact us.