VOL. 128 | NO. 101 | Thursday, May 23, 2013
Rays of Wisdom
Dana and Ray Brandon
Consider Retirement Funds Before Job Change
By Ray and Dana Brandon
Ray’s Take Job hopping, especially in the early years, is more common than ever. Careers are more evolutionary now, as the days of lifetime jobs seem long gone. However, a lot of retirement savings can wind up lost if care is not taken when changing jobs.
If your current employer matches any part of your contributions to a company 401(k) plan, the timing of a job change could cost you quite a bit depending on how vested you are. If you are close to being fully vested in the program you might miss out on a significant amount of employer-matched funds. It could pay well to check this out before taking a new job. It might even be a negotiating point.
Short of complete desperation, it is critical to avoid simply cashing out of that qualified plan. Twenty percent of the funds would be subtracted for taxes automatically, and you will probably have an additional 10 percent tax penalty for withdrawing early. Plus adding the remainder to the year’s income might put you into a higher tax bracket for an even bigger tax bite. Not only will your final gain be much smaller than the original figure, you’ll also have given your retirement savings a serious setback. It’s simply not worth it. This unfortunate outcome could also occur if you’ve taken a loan from the plan that remains unpaid.
To protect your 401(k), do one of three things: leave it in the plan of your old employer (if allowed), roll it directly into the 401(k) plan of your new employer (if there is no waiting period), or roll it directly into an IRA account. The better choice depends on the quality of the plans available at both employers and what you can find at other financial institutions. There are also a few more favorable options to a 401(k) versus IRA. The important thing is to always have these retirement savings plans transferred directly from one trustee to another. Receiving a check payable to you will cost you – now and later.
Dana’s Take All too often, people considering a job change look at the salary and don’t pay attention to the other benefits, especially if they are young and healthy. That can be a big mistake.
In addition to considering the advantages of the free money from employer contributions to a 401(k) plan, other benefits should be carefully considered, too.
Does the employer provide any subsidy for advanced degrees? Will their health care plan wind up costing you more in monthly contributions or co-pays? Are there perks like free parking, onsite childcare, or other value-added benefits?
Factoring in money-costing or saving advantages like these can change your monthly financial picture just as much as a raise might. Add it all up and that new job may look even better, or not nearly as good.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at email@example.com.