Considering making a job or career change soon? Tune in for some important financial steps to take before leaving a job on the latest #YouandYourMoney podcast featuring Michael Baum, CFP®, RICP®.
- Subscribe to the You and Your Money podcast
- Follow us on Facebook, Instagram, LinkedIn and YouTube
- See how we can help you create a tailored strategy to help you Plan Well, Invest Well and Live Well: whzwealth.com
Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Michael Baum, vice president and associate financial advisor and Weiss, Hale and Zahansky Strategic Wealth Advisors. Let's dig in to today's topic. Let's move on to today's topic. Financial steps professionals should take before leaving a job. I understand that if somebody has company issued stocks as part of their compensation package, there are actually specific strategies that can help retain more of that money out of those work. Yeah. So many companies offer employers,I'm sorry, many companies offer their employees stock as part of their overall compensation package, which is a great benefit. But if you're if you want to make the most of it, you've got to really understand how that works and do some careful planning. So if you leave a job or if you experience any one of a number of life events, the value of that stock could be subject to a hefty tax bill if you don't handle it in the right way. And the strategy that will help you, you know, make the most of that is called net unrealized appreciation or NUA. Is this a big deal? Do you get people that come in to talk to you and say, hey, I got to leave my job for one reason or the other? What should I do? In other words, they talk to you about the same things I'm talking to you about this morning. Yeah, absolutely. I mean, it's a any major life event is a common time for somebody to want to work with a financial advisor. And so, you know, our job is to understand the ins and outs of all of their financial situation, you know, from the house that they own, the debt that they carry, and you know, the benefits that come along with their current job. So those are all things that we would take into consideration. And it really helps to just sit down and get, you know, a holistic lay of the land and really understand everything and look for opportunities and look for strategies that can help make the most of their money. Now, before we get to that strategy, what is net unrealized appreciation? Three words I've never used in a sentence before. Yeah, so it sounds more complicated than it is, but it's really just the difference between how much you paid for that company's stock and what it's worth today. So if you paid $20 per share and those shares are now worth $40 per share, you have a net unrealized appreciation of $20. All right, that makes sense. So what is the strategy around that? So if you do it right, that $20, the net unrealized appreciation is taxed differently than other retirement assets. When you take a distribution from your retirement plan, it's basically a benefit to owning and holding employer stock. So what that means is that you may be able to transfer the company stock from your retirement plan at your previous employer without having to treat the entire distribution as ordinary income like you typically would. And instead you'd only have to treat what you originally put in as ordinary income. And that can save you a real ton of money in taxes. So, Michael, we've been talking about the NUA. Essentially, if you're leaving your job or maybe you turn 59 and a half, is it better to transfer those stocks into another investment account rather than just selling them outright? Yeah, that's that's the idea. It may be better. So that's that's something to definitely look into. And that's, you know, what we do. Because again, you're only taxed on your contribution amount and not on any unrealized gains. So you may be able to avoid taxation now and receive favorable long term capital gains taxes later. And the capital gains tax rate is no higher than 15% for most people, which is going to be lower than the income tax rate. Most people who have company stock as part of a, you know, equity compensation package from their employer will pay. So implementing an annual strategy by rolling the employer stock in portion of your retirement savings into a taxable investment account can really pay off in the short and long term. I'm assuming, though, there's a catch. Well, I wouldn't call it a catch, but there's just a number of requirements that need to be fulfilled and you have to do this just right. And then again, it needs to be considered alongside your overall financial plan. You must meet certain requirements to take full advantage of the strategy. For example, you have to receive the stock as a lump sum in-kind distribution and transfer it into your own investment account. So there's some mechanics to work through there. And then you also, you know, you have to fully distribute everything from your employer plan. So you can't just transfer the company stock piece out and take advantage of the NUA. You'd have to roll the entire the entire 401 K or the entire retirement plan and all benefits out of the employer plan at the same time. This NUA strategy. Net unrealized appreciation. That's a new one on me. Do you get people to talk to you, especially at a time like we're going to be leaving a job and they've never heard of it before and you kind of explain the concept to them. Yeah, absolutely. So, I mean, I've spoken with plenty of advisors who aren't familiar with the strategy and who don't know the ins and outs of it. It's complicated, right? So a lot of people may have this opportunity and they may at least want to consider it. You know, there's there's certain thresholds where it definitely makes sense and you're going to save a lot in taxes no matter how you slice it. And there's other scenarios where, you know, you may be better off leaving your employer's stock in a qualified plan and let it continue to grow tax deferred. But that's why it depends on everybody's individual situation and working with a financial professional to make sure they understand the options, they understand the strategy and can, you know, analyze what's going to save you the most in taxes in the long run. It's really important to do. That's good information. Michael, what are some other financial steps that executives and professionals should take before they leave a job? Well, the other big one is just what to do with your retirement plan. So when you're leaving one employer and starting with another, there's usually three feasible opportunities or options for ensuring the continued growth of your retirement funds. And it's important to figure out which option gives you the best overall tax situation and the most advantage for your long term financial goals. All right. So tell me what those three options are. You can leave the funds in your current employer's plan. You can roll them over to your new employer's plan, assuming they have one, or you can roll them over into your own IRA or investment account outside of any employer qualified plan. And how do I know which of those three options is the right one for my situation? So there's going to be a variety of factors that need to be looked at and considered. But some of the major things to consider, Wayne, are whether or not your new employer will even allow rollover. So that first option was to rollover an existing 401k or retirement plan into your new employer's plan. Some employers will not even allow that. So if that's the case, we can strike that one out. If rollovers are allowed, you'll want to compare your new employer's plan to your old employer's plan and figure out if the benefits of the new plan are better or if there's any potential tax consequences of rolling from one to the other. And the main reason you'd run into a tax consequence is if you were making both traditional pretax 401K contributions and Roth after tax401K contributions at your at your previous job. Not all plans allow for both types of contributions, and those technically are held in separate accounts within the plan. So if your new employer plan doesn't offer a Roth 401k or after tax contribution, you're not going to want to roll the Roth portion of your of your old employer plan into a new employer because you're going to have a hard time keeping track of the tax differences. You're going to co-mingle funds that have different tax treatments, and you're going to create a big headache for yourself. What about other details like age and vesting? How do those play into the decision making process? That's a great question, Wayne. So these are definitely other important things to consider. You know, depending on how long you've been at your your previous employer, you know, or your your current employer may be worth checking on what the vesting schedules look like. So your own contributions, what you put in and defer from your paycheck are fully vested from day one. But if your employer is making any sort of a matching contribution or profit sharing contribution, those typically vest according to a schedule and the employer publishes that schedule and makes it makes it known to all employees. But it can vary within certain limits set by the IRS. So when when those contributions are become fully vested and become yours and you're free to leave with them, if you leave, the company can really depend and if you're relatively close to a vesting date and you're thinking about leaving a job, you know, it may be worth sticking it out a little longer until you're fully vested in those employer contributions and age is another important factor, because once you turn 55, if you retire with your current company, you can take withdrawals from that employer plan penalty free. Normally, the penalty free age would be 59 and a half. So if you've moved funds from, you know, one employer plan over to your new employer plan after age 55, you may have just given, you know, taken away the opportunity to take those penalty free withdrawals, you know, a little bit earlier than you otherwise would have been able to. But obviously, it's little different, too, for the folks who want to keep working beyond 55 or 59 and a half. You're talking to one of them right now. So does that change the equation at all? I mean, are you more tax liable if you pull money out and then you get your new employer, you put money in? Is there a cap...There’s a capital gains factor there, isn’t it? Yeah. So that would typically be considered a tax free rollover and there would be no tax implications. So moving from one plan to another, you know, the way you handle that is not to have a check cut to you and then make a deposit into the new employer's plan. You actually coordinate between the plan custodians and have them make what's called a trustee to trustee transfer. So you never took the receipt of those funds. It's not taxable to you. It's just moving from one qualified vehicle to another. So you shouldn't have any tax implications if you do that correctly. Is there a difference in the process from if you voluntarily leave a job to move to another job or if you get fired from that job, which is why you're taking the other job? In other words, does the process change if you get fired? So vesting typically would stop when you leave the employer. Now, if you if you're leaving an employer. So what I mean by that is, you know, if you you have your contributions, again, those are fully yours. You can take those with you when you leave the job for any reason, but the employer match or employer profit sharing contributions. Those you need to, you know, stay with the company a certain number of years before they belong to you. And you can take them with you if you leave really for any reason. Typically the vesting would stop. But if you leave at a normal retirement age or an early retirement date, which is decided by the company, then oftentimes the vesting will be accelerated and all all of the employer contributions will automatically be considered vesting. And I think that one important thing to be made aware of here is our point today is that if you are going to be leaving your job and you do have investments with that company, which a lot of employers do have, you should probably bring on a financial planner such as the folks of Weiss, Hale and Zahansky to make sure that you handle it the right way. I mean, that's that's what you guys do, right? Absolutely. And yeah, I mean, I hope I hope I was able to explain some of these things succinctly and clearly. But it's a very complicated system. There's a lot of ins and a lot of out. So it's not necessarily the easiest thing to explain, to think way on the radio. But figuring out these complicated financial systems such as unrealized depreciation and what to do with a41k on top of all the tax implications, it's really no easy task. So that's why working with the financial planner who's skilled in wealth management is really valuable. And I, along with the rest of the team at some of the hands, do a lot of work helping our clients through these types of decisions and it's important to part of the overall long term strategy we build and maintain for our clients. So anyone listening today would like to learn more about how we can help them In the same way, just give us a call at 860-928-2341 or schedule a complimentary consultation on our website at whzwealth.com. That brings us to the end of this episode. As always, thanks for listening to You and Your Money. Find even more episodes, videos and other resources at our web site. whzwealth.com. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA/SIPC, a registered investment advisor, fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth advisors do not provide legal or tax advice. The tenured financial services teams strive to support clients achieving their financial life goals. For more information regarding wealth management and customize financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit. www.whzwealth.com.