Life Events: Changing Jobs

In today’s economy, you may have to look for a new job. A job change can be very stressful experience and it could lead you to ignore your long term financial goals. Most employers provide a retirement plan such as 401(k) and it is important that you take care of your financial life attached to your past employer. While employer contribution may have a vesting schedule, money you contributed to your retiremet account is your money and you are free to take it out of your old employer's retirement plan and invest it elsewhere such as a rollover IRA. If you elected a health plan with HSA, you may have money leftover in your HSA account. You may also have a flexible spending account or dependent care account with your previous employer. In order to keep your financial life on track, these accounts need to be taken care. This article explores some of the options that you may have and how to handle a job change.

Your Retirement Account Such as 401(k), 403(b)

This is probably the most important item when you change jobs. You have following options when it comes to your old retirement accounts.

• Transfer the old retirement account for your benefit into a Rollover IRA
• You may be able to leave your retirement funds with past employer and manage them
• Rollover account balance to your new retirement plan (if available)
• Cash out your old retirement account
• Rollover your retirement account into a Roth IRA account

The first option allows you to maintain the tax-deferred status of the retirement funds, while keeping the retirement funds under your direct control. You may expand your investment choices, and you’ll be able to make additional contributions to the IRA, within IRS guidelines. A rollover IRA also allows you to consolidate retirement funds into a single account. This may be particularly appealing if you have more than one retirement account held for your benefit with your former employers. Also, you may be able to convert your 401(k) account in to a traditional IRA and then to a Roth IRA if you qualify. Currently there are income restriction on Roth conversion but starting in 2010, income restrictions for Roth conversion will expire. Anyonw with a IRA account should be able to convert it to a Roth IRA in 2010. Please note that income restrictions on contributions to Roth IRA will sta in place. If you decide to rollover your old retirement account into a traditional or Roth IRA, you should remember to do "Custodian to Custodian" transfer. This will save you hassles with taxes and IRS. One of the simplest way to do it is to open an IRA account with one of the online brokers(Scottrade, Ameritrade etc) and then contact your old retirement plan and let them know that you'll be transferring it to a new rollover IRA. You will have to provide them the name of the new custodian(for example, Ameritrade) and the account number of your new IRA account. Once rollover is completed, you will have full control of your IRA account, You can invest in stocks or mutual funds. You can even leave it in money market funds. If you need investment advice, you can also utilize your discount broker.

Second option is to leave your retirement funds with your previous employer and manage them. This option allows you to maintain tax-deferred status of your retirement funds. Also keep in mind that since your retirement funds remain under the umbrella of your former employer’s retirement plan, your investment choices may be limited to those available through your former employer. You are not allowed to make additional contributions to this retirement plan. Your former employer may also charge you fees since you're not actively contributing anymore but you can get same investment choices and good returns.

One of the important things to keep in mind is that unless your retirement account balance is over $5,000, most retirement plans will send you an automatic distribution unless you make arrangements to transfer your account. Remember, even if they held taxes and sent you a check for your distribution, you still have 90 days to rollover these funds to a new IRA account and get credit for your taxes and avoid the early distribution penalty but it will be a lot more work as compared to "Custodian to Custodian" transfer.

Third option is to bring your old retirement funds to your new employer's retirement plan. You may have to satisfy an eligibility period before you can fully participate in the plan. This is pretty much identical to "custodian to custodian" transfer but you get the benefit of your new employer retirement fund choices as well as single account to manage. However, you have to keep couple of things in mind before you pick this option. First of all if you're going to leave your new employer in next couple of years, you'll face the same issues again with transferring retirement funds.

Another option and the least favorable option is to cash out. This is also known as "Early Distribution". This option puts money in your pocket right away but at a big cost to your long term financial future. You'll pay 10% early withdrawal penalty. You'll also pay federal taxes, state income taxes, social security taxes and Medicare taxes. On top of everything, final distribution amount will be treated as ordinary income and will be added to your gross income at the end of the year for calculating federal and state income tax. You may also lose the potential value of future earnings. If distribution amount is substantial, it may even put you in a higher tax bracket causing you more financial pain. If you decide to take a cash distribution, keep in mind that you don't have to cash out the entire account balance. You can take a portion in cash and potentially avoid taxes and penalties by rolling the remainder into another qualified retirement plan. Here are some simple calculations to show you the full financial impact of an early distribution.

It is evident from the data table above that you paid almost 50% of your retirement funds in taxes. On top of everything, the net payout of $12,587 can also put you in a higher(for example, a 28% tax bracket) and that will add to your tax liabilities at the end of the year.

Health Saving Account (HSA) and Flexible Spending Account (FSA)

These accounts offer same tax advantages as 401(k) or IRA accounts. Money deposited to these accounts in deducted at a pre-tax basis giving you almost 30-40% tax break. Due to the tax deferred nature of these accounts, if you change jobs, you should pay close attention to these accounts. If you were enrolled in HDHP plan with HSA, you can transfer your HSA account to any bank you would like. Money deposited in HSA is your money and you can take it with you. Only exception would be employer contribution, if any. Employer contribution may be subjected to some terms and conditions that you must meet in order to claim that money. If your new employer offers HDHP health plan, you can rollover your old HSA funds to your new HSA account. If they don't, you can put it in any HSA stand alone account and continue to use it for healthcare related expenses. Flexible spending and Dependent care accounts are pre-tax dollars as well but you must incur qualified expenses by Dec 31st or you lose it to federal government. However, you have until April 30th, to submit claims for the priory year qualified expense.

You should also contact human resources department at your previous employer to cash out any unused vacation time that you may have had. Remember, most employers allow you to only accumulated up to a certain amount of PTO and sometimes PTO that is allowed to be paid out is even less than that. So before you leave your job, make sure you know the rules about unused PTO.