Your Checklist When Leaving A Job

If you’re one of many leaving a job, whether moving to a better position with another company or in the despair of having been laid off, it is critical to tie up financial loose ends.  Lack of attention and caution in the haste of leaving may cost you money.  Don’t leave benefits behind or trigger unintended consequences.  Take a look at this financial checklist when leaving your job.

Decide what to do with your 401(k)

You have three options for your vested account balance.  One, roll it over to an IRA at a bank or brokerage firm.  The key advantages to this approach are that you have almost limitless investment options, and when you start to take distributions in retirement, there is more flexibility.

Second, you can roll the balance over to your new employer’s plan.  By combining your old plan dollars and your new plan dollars, you have all your assets in one place, and usually in a fairly cost effective set of investments.

If you aren’t going to a new company right away, you can leave your 401k balance where it is, which is option No. 3.  As a former employee you are entitled to continue as a participant, obviously without matches or additional vesting, as long as your account balance is over $5000.  However, if the balance is below $5000, you will probably be required to move it (rollover) to an IRA or take it as a distribution.  If you take the distribution, it will be a taxable distribution, subject to ordinary income taxes and a 10% penalty if you are under age 55 or 59-1/2, depending upon the plan.

Pay-off your 401k loan balance

If you have a loan balance in your 401k, understand the consequences of not paying it off right away.  Upon termination of your employment, you are required to pay off the loan.  Contact your Human Resources coordinator to get the terms and the deadline.  Once this deadline passes, the plan will sell investments in your account to pay off the debit balance, thus creating the same taxable event as described above.

You will pay ordinary income taxes on the amount sold to cover the loan, as well as a 10 percent penalty if you are under age 55 or 59-1/2.  Even if you choose to rollover your vested 401k balance to an IRA or your new employer’s 401k plan, the loan must be paid off before the account can transfer.

Ask for a summary of all vested account balances

Many times an employer will make matching contributions or profit sharing contributions to an employees’ account in the 401k plan.  Sometimes these company contributions vest immediately and other times they vest a percentage each year over a certain number of years.  When you leave a company, you are entitled to receive only that portion of the companies’ contributions to your account that are vested.

Knowing your companies’ vesting schedule and the rules that govern pay-off of a loan to your 401k are important pieces of information to have when timing your departure.  Would staying put an extra month or quarter and get you the company match or vesting. How much would that mean in additional dollars?  If you had more time to pull together the funds to pay off a loan to your 401k, could you delay your departure and avoid a taxable event?

There are also balances that may have accumulated for you in a defined benefit pension plan, money purchase plan, deferred compensation plan or employer stock option plan.  Ask for a full accounting of these plans, so you can know what assets are eligible for you to take with you and what the tax consequences are of your elections.

Decide between the lump sum or annuity from your pension plan

Most companies don’t offer defined benefit (pension) plans any more.  If you are fortunate enough to have earned a pension with your company, you will be asked to make an election.  You can take it as an annuity or as a lump sum.  This is an important decision that has far reaching consequences, particularly if you have accumulated a significant benefit and have a spouse.

The best advice you can get is from your tax advisor, who will help you understand the break-even points in your annuity options versus taking a lump sum distribution and rolling it into an IRA.

Don’t forget the stock options

If you have vested stock options, you need to understand what the deadline is for you to exercise them.  Most companies have a short window within which you can exercise options after termination of employment.  Sometimes they must be exercised immediately, others within 60 days and some within 6 months.  Don’t leave money on the table by failing to know what your companies’ policies are.

Obviously only those options that are “in the money” are of any value.  “In the money” means the grant price or strike price is less than the current market value of your companies’ stock.  You can do a “cashless exercise” whereby the purchase of the stock at the grant price is offset by the sale of the stock at market price.  Your company administrator will withhold the income taxes due, and you’ll net the difference.  Mark your calendar to watch the stock price as the expiration dates close in, so you give yourself enough time to complete the transactions.

Get the cost basis of the company stock you own

Whether you hold company stock in your 401k or in a stock purchase plan, it is important you get the cost basis.  Once you leave the company, you will find it very difficult to get the information you’ll need for future tax reporting.  Why is this a big deal? Because when you sell the stock and have to pay taxes on the gain, the IRS says “if you don’t know your original acquisition cost, then we’ll just consider it $0”.

In the case of company stock in your 401k, it is also valuable to know the original purchase price because of a provision in the tax law that allows special tax treatment of company stock in retirement plans.  This “net unrealized appreciation” has to be accounted for and treated differently before you roll over the balance into an IRA or new employers’ plan.

Know that health insurance has to follow you

Federal regulations require that companies provide the option of continued health insurance coverage after termination of employment.  COBRA gives you the same coverage as you had while still employed for a period up to 18 months from termination.  The cost you paid as an employee is not guaranteed to you as a now former employee.  In some cases, you can expect to pay the entire premium – the amount the company paid on your behalf and your portion.

Be as diligent when you leave as when you started

Remember how focused and attentive you were when you first started the job you’re leaving?  You read the employee handbook, studied the health insurance benefits, sat through new employee orientation, and asked so many questions.  You need to be every bit as diligent about gathering information when you leave a job as when you started.  Often times the single largest lump sums of money we accumulate in our lives are the employer sponsored retirement plans and executive compensation plans we earn while working.  Don’t leave money on the table.

Written by : Lisa Boone

Boone is a Vice President and Financial Advisor for Morgan Stanley Smith Barney and a CERTIFIED FINANCIAL PLANNER™.