5 Critical Wealth Management Questions to Ask During an Employment Change

In today’s blog post, we will dive into five critical wealth management questions to ask during an employment change. Sometimes, employment changes can feel overwhelming when you have to deal with benefits, taxes, and income adjustments. I hope today’s post will give you some clarity and confidence as you make financial decisions when making employment changes. Confidence that these strategies are designed to help you secure your future and live your very best life. To watch the video version of this post, please click here.

Question #1: How does my financial plan’s probability of success change?

The probability of your plan’s success will go up or down (your financial plan’s probability can be determined using Monte Carlo simulation or other analysis). I rarely see it stay the same. Knowing the answer to this question could give you a lot more clarity and confidence in your upcoming decisions or just help you feel more secure in your future.

If your plan’s probability of success increases, that might help you make decisions about pursuing new financial goals, adjusting retirement time horizons, giving amounts, or give you more freedom to enjoy the wealth you have. On the other hand, if your plan’s probability of success decreases, first of all, you’re not alone.

Many people have that outcome, and sometimes it’s actually desired. You may be getting a better job or a job with less stress, or it may allow you more time with loved ones. If your probability of success isn’t where you want it to be, like it is for a lot of the people that we work with, if the probability of success in historical stress testing is below 75% (let’s say it’s at 50%), that might be a great opportunity to be proactive and adjust some of the goals and assumptions in your plan to get to a point where you feel more secure in your future.

If you have an offer letter and your financial plan’s probability of success stays the same or decreases, that can be a great negotiating tool or point with your future employer if you haven’t accepted an offer yet. You could express your appreciation for the offer and restate the value that your experience brings to their team (and how you can use that to help them succeed). Also, mention that you’re not sure you could move forward if the offer is neutral or if it’s taking you back a step in your financial plan.

We’ve seen clients use that method to sharpen up the offer and tip the odds in their favor with their compensation or benefits. If you don’t have a financial plan that tells you what your probability of success is with your current employer or the next employer, you’re not alone. A lot of people don’t have a financial plan, but now could be a great time to develop a plan to see if you’re on track to achieve your goals.

So, that is question number one. How does your probability of success change with your new employment offer when faced with a job change?

Your financial plan can also help you explore tax minimization opportunities. And that’s question two.

Question #2: What unique tax minimization opportunities exist this year due to my job change?

In 20 years, I have never seen somebody’s income and benefits stay the same in the year of a job change. I’m not saying it’s impossible; I’ve just never seen it. Typically, if you’re changing jobs, your income either goes up or down. Taxable income is up in the projections, or it’s down. Both scenarios present a unique tax planning opportunity that might not exist for quite some time.

What does this mean? Well, if your income projections are up for this year compared to prior years, you could proactively explore some opportunities to lower your taxable income, which could include adjusting deferred compensation or your 401(k), 403(b), or TSP (Thrift Savings Plan) contributions. It could mean that you might want to consider creative charitable giving, batch contributions, or start a family charitable fund or a Donor-advised fund.

Doing one of those things could help lower that tax burden, especially if you jumped a tax bracket. On the flip side, if income is down this year because of an extended search, or maybe you lost out on some options that you typically would exercise, this could be a great time to move money from a taxable source, like a 401(k), into a Roth IRA because of the lower tax bracket.

For example, if you were in the 35% tax bracket and went down to the 24% bracket, that’s an 11% potential decrease in federal income tax when you compare those brackets. That could be a great time to look at and consider those types of opportunities.

Additionally, this can be a great time to compare your Roth 401(k) or Roth 403(b) projections to your Pretax 401(k) and 403(b) projections. If you have a financial plan and you’re running tax projections, this could be a great time to analyze your current strategy and see if you need a change.

For example, suppose you’re currently making all pretax contributions. In that case, you might consider running a Roth as part of a scenario to see if it increases your after-tax wealth in your planning projections. Remember, there are income limitations to open Roth IRAs, so this option would only be available to people who fall under those income limits.

That’s question #2: What unique tax minimization opportunities exist this year when you’re faced with a job change?

Question #3: How can I optimize company retirement plans and potentially avoid 401(k) headaches?

When people leave employers, they are sometimes eager to get their money out, even if they didn’t leave on bad terms. But I would encourage you to ask: What option is best for my 401(k) assets?

It could be leaving it where it is. It could be moving it to a rollover IRA,  where you can access more investment options instead of a limited menu of choices. Maybe it’s better to move it to the next employer plan. Although it might be rare, sometimes the best option could be to cash out the plan.

In addition to those options, you might want to consider what choices you have for Roth conversions or what options you have for beneficiary designations. Some employer plans are very strict about that. They don’t let you name trusts.

You’ll also want to ask how many investment options there are. What are the costs? What are the restrictions? There’s a laundry list of items you’d want to analyze to determine how you could optimize the money you worked hard for and accumulated in your 401(k).

Regarding your 401(k), let’s talk about some of the 401(k) headaches you can potentially avoid when changing jobs. One of the most common headaches sometimes difficult to avoid is employers not talking to each other. So, if you were working for Target and you went to Walmart, or let’s say that you’re working for Chevy and you moved to Ford, those competitors don’t talk to each other. They don’t share how much money you contributed to your 401(k).

That situation can sometimes lead to you being at risk of making an excess 401(k)contribution if you’re not managing your contributions. That means at tax time, you could get a letter from the IRS, or your accountant might tell you that you over-contributed and need to take money out of your 401(k).

So, it can make sense to proactively ask how you could avoid that excess contribution headache.

Sometimes, the second employer offers a more significant match than the first employer. In that case, you might want to explore over-contributing on purpose and go back to your initial employer to see if they’ll refund your contributions because you could get a bigger potential match. Your initial employer might not do that, and if that happens, you would need to be proactive and call your financial advisor to determine what might be in your best interest.

So that’s question three to ask in the year of a transition: How could you optimize your company retirement plan benefits and avoid potential 401(k) headaches?

Question #4: What is my stock award strategy with my old and new employer stock award plans?

If you do not have a stock award plan, or a stock strategy, you could just skip to the next question.

If you do have a stock award plan, your strategy can impact your tax projections. Your stock award strategy can also impact your investment strategy. And if you don’t have a strategy but you have stock awards, or you will soon have awards, now can be a great time to explore how much exposure you should have to one company stock. And that can help you determine how much you might want to sell off in any given year. Your answer to that can depend on how reliant your plan is on your company’s stock price and its performance.

Over the years, I’ve seen many clients set a limit of 5% of their overall portfolio for stock awards as a strategy to reduce concentration risk. I’ve seen some clients exercise their awards and deposit the money into their bank account, or they use it to fund strategies that could qualify for tax-free withdrawals like backdoor Roth IRA contributions or tax-advantaged 529 plans.

I’ve also seen other clients who accept a higher level of risk, over 5%, and I’ve commonly seen that a little bit more often when a client’s probability of success is at the higher range, closer to 100%. So, what makes sense for you will be unique to your situation, your plan, your business, your tax strategy, and your tolerance for taking risks.

To recap, question #4 is: how can you maximize your stock award strategy? That includes questions like, what is your stock award strategy? What’s your tax strategy? How much exposure do you want to one company’s stock?

Question #5: What insurance benefits do I actually need when signing up with a new employer?

You might have lost some coverage: medical insurance, disability, life, long term care, maybe other optional benefits that you elected with your prior employer. A mistake I see too many people make is they wait until enrollment day, and they try to contact me very last minute to make some decisions. Sometimes I don’t feel confident in those decisions because we didn’t have time to run an analysis.

I typically would suggest and urge you to run an insurance analysis before you make those decisions on enrollment day. I’m very biased on this next part. Still, my opinion is you should work with a fee-only financial planner who doesn’t get paid if you buy more insurance and doesn’t receive a referral fee from an insurance agent, because I believe those are conflicts of interest that can result in you buying more insurance than you actually need.

I’m not saying insurance agents are bad, but if you buy more insurance than you need and you don’t die prematurely, get disabled prematurely, or need long-term care, you’re essentially giving the insurance company (and likely the agent) more money. So, I recommend doing an analysis.

Of course, you need a financial plan to do an analysis and figure out what you actually need or want. Then, you can shop out the coverage, ideally with the independent broker or your current insurance agent, and compare that to the options through your employer.

So that is question #5: what insurance benefits do you actually need? Knowing that, you’ll be empowered going into open enrollment.

If you’re facing an employer change, I hope this blog post equipped you with some questions you can ask to gain more confidence and clarity about your upcoming financial decisions, whether regarding your benefits, stock awards, or insurance.

If you don’t have a financial plan or need help answering these five questions, click the Get Started button and request an initial consult.

One Life Financial Group provides a comprehensive tax minimization process and uses sophisticated software to help you uncover opportunities to help minimize your tax bill. However, One Life does not process tax returns. Discuss all tax planning opportunities with your accountant and financial advisor before implementing tax planning strategies.