This original article was written by Kathleen Adams for Forbes.
The prospect of leaving a job to embark on a new chapter of your life may bring up feelings of excitement or anxiety or a mixture of both. Whether you are retiring or thinking about starting a business, there will be many important financial decisions to consider. Caution and preparation will help you sleep better and possibly avoid a devastating mistake.
What happens financially in the first one-to-three years after leaving your job has been proven to be critical for long-term success. Here are a few things to keep in mind:
Deciding if, and when, to rollover your 401(k) from a soon-to-be former employer is usually the first step people think of when leaving a job. In my view, however, there is another step that should be considered first: clarifying your health insurance situation.
If you have a group plan, the continuation of your health insurance will be via the federal COBRA law if you won’t have new coverage immediately. If you are age 65 or older, check with the HR department or your health insurer about whether you need to be enrolled in Medicare Part A & B along with your group plan. If you have a COBRA plan and do this incorrectly, you might be denied benefits, which can be a financial disaster. Keep in mind that Medicare Part A is free, but there is a premium cost for Medicare Part B.
If you’ll be leaving a small business with no COBRA health coverage, make it a priority to explore individual coverage while you are still insured. Understand the costs and your eligibility.
Regarding your 401(k) options, be careful. Your choices typically include rolling the money directly to an IRA or into another 401(k) if you’re switching companies; taking it out as a lump sum (which is rarely a good idea) or leaving it in your current 401(k), if permitted.
A few important things to know about your 401(k):
If you’re 55 or older, you can take a 401(k) distribution without penalty (although it will be taxed).
If you have after-tax dollars (contributions made that were above the annual deductible amount as determined by the Internal Revenue Service) in the 401(k), you will have extra options to consider, including potentially rolling that portion into a Roth IRA.
If you have employer stock in your plan, you may have options that could help lessen the tax that will be owed on the money, as long as you do not roll the stock into a traditional IRA. Talk to your financial adviser for a full explanation of this option.
If you have other retirement plans, such as a defined benefit plan that will pay a pension in installments or a lump sum, it’s best to visit a financial planner because this will be a significant and irrevocable decision. Don’t choose one way because your co-workers have all done it that way.
If you have participated in a deferred compensation plan, clarify in advance what the payout or distribution schedule will be. These plans cannot be rolled over to stay tax deferred.
Finally, be careful about how you handle your retirement plan investments. Much research has been done on the devastating effect of withdrawing your investments during a severe or sustained market decline. You can create an investment plan that manages this risk.
Use caution and get professional financial planning help and you will be ready to start the next adventure with confidence.