I recently left my job.
I am very excited about the potential opportunities ahead of me and look forward to the next chapter of my career. However, I am not sure what this means for my personal financial situation. I don’t know if I am doing the right things. How do I ensure that I am doing the right things when starting this new chapter of my life?
Should I rollover my 401(k) now that I have changed jobs?
Leaving your job can be hectic, whether you’re retired, laid off or moving to a new company. It may not cross your mind to take care of your previous employer-sponsored retirement plan, but this is an important box to check during your transition.
You have four options when it comes to your retirement assets: leave them with your former employer, roll them over into your new employer’s retirement plan, roll them over into an IRA or cash out. As with most financial decisions, there are pros and cons to each choice, and your specific circumstances may make one choice more appealing than the others.
While there are various options available, and we weigh the pros and cons of all scenarios for our clients, Ferris Capital almost always recommends the option of rolling the account into an IRA for a variety of reasons. Most 401(k) plans have a very limited scope of potential funds to invest in their plans. By rolling the former 401(k) into an IRA, you now have the ability to choose from the entire universe of available low-cost ETF index funds, and actively managed mutual funds. Couple that with the higher administrative fees, and often hidden costs associated with 401(k)’s, and the IRA makes sense for most people. An IRA can also be more convenient, because you won’t have to worry about rolling it over again if you leave your job in the future. One feature unique to IRAs is the ability to take penalty-free distributions early (before the age of 59 ½) in order to pay for your first home or qualified higher education expenses. You’ll still pay income tax on the distributions, but you’ll avoid the fees that you’d accrue if you cashed out of an employer plan. An IRA can also be a great vehicle for your heirs, who have the option of stretching out required minimum distributions with a traditional IRA, or avoiding them altogether with a Roth IRA.
There are two types of rollovers, whether you’re rolling your money into a new employer plan or an IRA. A direct rollover is from plan to plan. No taxes are withheld, no penalties are owed and no money crosses your hands. For an indirect rollover, your previous plan administrator writes a check to you, withholding 20 percent for taxes. You’ll have 60 days to transfer it to your new plan or IRA. If you exceed 60 days, you won’t get the 20 percent in taxes back when you file a return, and you’ll owe an additional 10 percent penalty for early withdrawals. A direct rollover is a simpler, safer route, but you’ll have to make sure you have an IRA or new employer plan established first.
The team at Ferris Capital can help you open an IRA account, and rollover your former plan quickly and efficiently. Once the IRA has been established, our Investment Committee will help to determine the appropriate risk profile and mix of diversified investments for you.
How do I navigate changing jobs, and new job offers?
Changing jobs can be an exciting, yet busy time. Setting up for the next chapter of your life often entails important decisions that should be made with the best information available. Understanding all of the elements within your new position is critical to ensuring your happiness at your next place of work. It’s important to understand the following before accepting an offer:
Culture and atmosphere at the office
Job function and reporting responsibilities
Health insurance and other benefits
Retirement planning and 401(k)
Time off and vacation
Do you know your options for moving retirement assets?
Throughout the busy process of leaving your job, you’ll have many financial to-do’s to take care of and choices to make. We can answer these questions and more.
Should you keep your retirement assets with your former employer or roll them over?
How can you complete a rollover without owing taxes and penalties?
How will you maintain insurance coverage when you’re between jobs?
Can you afford to pay the bills if you’ve taken a pay cut or lost your job?
How will your tax situation change when your income changes?
The professionals of Ferris Capital are here to assist you. We’ve helped many workers and retirees navigate their finances after leaving a job, in areas such as:
Rolling over retirement assets
What to do with former employer stock options and vested assets
Continuing insurance coverage
Re-evaluating a personal budget
Rolling over your retirement assets may be the last thing on your mind during a job change, but failing to take action can be a costly mistake. Let us educate and guide you in your transition so you can move on to the next exciting chapter of your life
How do I turn my “paper wealth” into real wealth?
It is important to remember that stock options are different from stock ownership. Stock options are benefits that give employees the right to purchase company stock. However, until you exercise your options, you do not actually own any stock. Furthermore, simply owning company stock does not create real wealth. You do not realize a gain (or loss) until you actually sell the stock that you own. Hopefully you sell the stock at a price that is higher than what you purchased it for.
You create liquidity by selling your stock and diversifying your holdings away from your concentrated position within your company. This enables you to turn your paper money into real money and creates actual wealth. Many people fall victim to the emotional aspects that go along with owning stock.
The important question to ask yourself is this: What would hurt more, selling your stock and missing out on an extra 20% of upside appreciation, or, not selling your stock and watching it decline by 20%, thereby decreasing your net worth?
There are many more factors and scenarios to consider before selling your company stock options. Ferris Capital has the experience to help you answer these questions, and create a plan to divest from your concentrated position, while ultimately diversifying your assets into a balanced investment portfolio.
Get in touch with our experts
The Ferris Capital Process
We firmly believe that the best results come from a consistent process with a thoughtful design.
We use low cost ETFs, mutual funds, individual bonds, and stocks to build custom portfolios for our clients that are in line with their larger financial plan. We always seek to use the lowest fee, most efficient investment vehicles possible and to utilize best of class managers when they offer more value than an index or ETF.
Understand Your Goals and Financial Situation
Ferris Capital meets with you to fully understand your goals, time horizon, anticipated cash flows, and feelings towards investments in general . We also conduct an in-depth evaluation of your total financial picture including insurance, wills, trusts, and employee benefit options.
Create a Financial Plan Tailored to Your Goals
Ferris Capital works with you to develop a comprehensive financial plan that positions you with the highest probability of success in meeting your goals. The plan includes goal-driven asset allocations, tax sensitivity, long-term estate planning, and overall risk management.
Establish the Proper Accounts and Legal Structures
If applicable, Ferris Capital can direct you to top notch accountants and attorneys or work with your existing relationships to formulate and execute the structures and strategies to best protect your assets from taxes and liability.
Current Investment Evaluation and Tax Analysis
We analyze your current holdings to see if there are any embedded taxable gains or additional issues that should be considered in building your portfolio. If there are any issues, we will construct the investment portfolio to address those issues specifically and potentially use the existing investment as proxies to our investment model choices.
Using the risk profile from the financial plan and the considerations from the analysis of your existing assets, we manage your capital in one of our strategies that corresponds with your risk level which are designed using our proprietary market outlook, historical asset class performance, manager interviews and internal expenses.
Ongoing Maintenance, Monitoring, and Reporting
Ferris Capital monitors market and portfolio changes and keeps you informed on performance, risk and goals-based progress through quarterly calls or meetings. We also look to address any liquidity needs or life changes that may impact the long-term financial plan.