By Damon Poeter
Leaving a job is a hectic time. It’s easy to get swept up in the process and let some details fall through the cracks – like handling any job benefits you’ve accrued or need to replace after you’ve left.
If you’re leaving a private-sector job with a retirement plan, chances are you’re dealing with a 401(k). Your first order of business when taking care of your 401(k) is to remember that you have one. Shockingly, “more than 900,000 workers lose track of 401(k)-style defined-contribution plans each year,” according to Bloomberg.
You have several options to consider when you’re leaving an employer who’s been managing your 401(k):
• Cash out
• Roll it over to another retirement instrument like an IRA
• Roll it over to a 401(k) program at a different job
• Keep it with your old employer, if that’s allowed
The optimal choice for many people is to do a direct rollover of their 401(k) account to the 401(k) program at their new job. Keeping an account with an old employer is another popular choice.
If you can’t do either of those things, it may be a good idea to roll over your 401(k) to an IRA, says Robert Steen, USAA advice director for Retirement and Complex Financial Planning. Ideally, you would do this through what’s called a “custodian-to-custodian transfer.” A custodian-to-custodian transfer moves the funds from your 401(k) to your IRA without the money ever passing through your hands, preventing you from being tempted to dip into those funds.
“Also, make sure you know all the rules. Some 401(k) plans will automatically liquidate a balance below a certain amount, typically $5,000,” he says. “If the plan administrator can’t contact you, they might send a check to the last address they have on file for you – and that could be bad if you’ve moved and don’t get the check.”
The least desirable choice is to cash out, because your 401(k) is intended to be a retirement account. You might be taxed on the money you withdraw from it. “Remember why you put money into your 401(k) in the first place. Cashing out and spending the money will leave you with less for your retirement,” Steen says.
Stock options are a form of compensation offered by employers to employees that gives the employee the ability to purchase stock in their company if they choose. Just like 401(k) plans, stock options usually have to vest over a period of time that the employee is continuously employed by the company before the employee can exercise the option and purchase stock.
The bad news is that if you leave a job before your stock options are vested, you will likely lose them with no compensation in return. An exception might be if you are retiring and your company allows your stock options to keep vesting after you leave.
The better news is that stock options aren’t always worth exercising anyway, according to Steen. For example, stock options at a startup might never amount to anything if the company never goes public and begins offering stock.
Even after you leave a company, you may have the opportunity to exercise any vested stock options – a typical grace period for doing so is 90 days after leaving. Just make sure it’s worth doing.
“You need to ask: Are the options worth anything? How does the stock look in your investment portfolio? Understand what you can and can’t do and what you have to pay to exercise an option, and if it’s really worth it and what the tax implications are. Your company may have a buyback option, so also look into that,” Steen says.
Robert Steen, CFP®, MBA, is the enterprise advice director for Retirement and Complex Financial Planning at USAA. Robert serves as the advice expert on retirement and complex planning topics such as maximizing retirement savings, establishing a retirement income plan, managing financial needs during retirement, estate/trust/inheritance tax planning, charitable gifting and distribution of assets.
USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer and investment adviser, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI. Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
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