You Quit Your Job — Good for You! But How Does that Impact Your Investments?

Wednesday, June 23, 2021 | Melissa Brock
You Quit Your Job — Good for You! But How Does that Impact Your Investments?

As companies make plans to return employees back to the office, millions of workers have made a decision not to go back at all. 

In fact, the number of people who quit their jobs increased to four million in April and increased 2.7%, according to the Bureau of Labor Statistics (BLS). The largest increases in employees leaving their jobs occurred in retail trade and professional and business services. Transportation, warehousing, and utilities also experienced large numbers of employees leaving. The South, Midwest and West regions experienced the most employee departures, according to the BLS.

Did you leave before you had another job lined up because you can't stomach the thought of going back to an office? Or did you have a job lined up? No matter what your circumstances, learn more about what could happen to your hard-earned investments, particularly your 401(k). 

Risk 1: You May Lose Out if You're Not Vested

Did you happen to check your vesting schedule? When you quit your job, you may not have been fully vested and lost out big-time on employer contributions. A vested benefit involves a financial package granted to employees who have met the term of service required to receive a full benefit — not just a partial benefit. The amount you become vested gradually increases over a period of years until you become 100% vested. A typical vesting period goes from three to five years, depending on the company. You're not considered fully vested until you have full rights to your money.

So, what vesting schedule did your company follow? And when did matching contributions get put into your account? If you left before you nabbed your company's contribution, you probably lost it. Oops.

Risk 2: Your Rollover Landing Spot Might Not Be as Good

You've heard the old advice: "Quick! Move the money from your 401(k) into an IRA (also called a rollover IRA!"

Sure, the benefits may involve more investment choices, lower fees, extraneous costs and more. However, it's possible that your employer's 401(k) plan might actually be better, particularly if you don't spend a lot of time doing research to figure out the perfect place where you should put your money. 

Much depends on the differences between your old 401(k) plan and the new one. Compare all investment options, fees, terms and features at your new brokerage.

Risk 3: You Could Lose Money in the Process of Rolling Over

Did you know that you could lose money with a rollover if you don't do it the right way? 

For example, if your former employer doesn't write a check directly to the company handling your new IRA and transfers the money to you, you'd better get it deposited quickly. You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. 

Note: That’s 60 days, not two months. Let's imagine a computer programmer named Alex. Alex learned his lesson the hard way. Let's say Alex leaves his company on July 31 and asks his company to send him the money in his 401(k). He intends to roll over the amount after he finds the right traditional IRA to put it into. 

He keeps the money in his bank account, thinking, "I'll roll that over at the end of September." Unfortunately, because he left his job on July 31 and waited until September 30 to roll over his money, he went over the 60-day rule by one day. He didn't get a waiver or extension from the IRS.

What happens if you don't complete the rollover within the allotted time? In most cases, the IRS treats the amount as ordinary income. In other words, you must report the amount in your 401(k) as income on your taxes at your current income tax rate. In addition, you'll get hit with a 10% penalty on the withdrawal if you aren't 59½ years old when you take the distribution. 

Risk 4: You Could Lose Your Groove with Investing

Humans are creatures of habit, and when something disrupts their automatic savings. In other words, it can seem pretty tough to get back into the investing groove, particularly if you chose to automatically invest money into your 401(k). 

If you decide to go back to school, start a business, stay home with family or do something else entirely, these changes mean you may have to make completely different choices with your investments. It also means it might be easier for them to slip by the wayside.

For example, let's say that Alex just became self-employed. At this point, he has his Roth solo 401(k) all set up, but he's paralyzed by the potential amount he can contribute (the Roth solo 401(k) cannot exceed $19,500 per year). Because his income fluctuates a bit now that he has his own business, it's harder for him to determine how much to put away per month, and he may not even like to make it automatic.

It was easier with his old job as a computer programmer — the money got whisked away each month and he didn't think about it. Now, it's harder. 

Risk 5: You May Get Lazy as You Wait for a Great Match

Even if you already have a job lined up after you quit, you may have to wait a while before you can tap into your employer's 401(k) plan. So, should you pretend like you're laying on the couch, binge watching Netflix sagas? No, you should invest as you wait for your new employer to let you climb aboard the company's retirement plan. If that means opening an account with Robinhood, so be it.

The Pursuit of Happiness Could Cost You

Are you one of the millions who, during the pandemic, realized that your job is a soul-sucking leech on your happiness? You may trade up for a new work-from-home job, a new business or even a decision to dedicate your time to family or travel.

But for heaven's sake, have a plan in place before you choose to quit your job — and that includes making sure you direct your investments.


7 Stocks That Could Benefit From a Capital Gains Tax Hike

One thing every investor needs to learn is the effect of capital gains on their investments. Every time an investor sells a stock that has appreciated in value, that capital gain is subject to being taxed. Stocks that are held for less than a year pay a short-term capital gains tax rate. Stocks that are held for over a year pay a long-term capital gains tax rate.

In general, a capital gains tax hike is a bearish indicator for stocks. However, there are a couple of strategies that can help investors avoid some of the tax hit. One strategy is to keep your investments in an individual retirement account (IRA) or 401(k). However many higher-income earners want to have more access to the funds in their brokerage accounts.

A sound strategy for these investors involves buying dividend stocks. Dividend income is also taxed (unless it is reinvested), but typically when the capital gains tax rate is raised, the dividend income rate stays the same. This makes dividend stocks more attractive.

Investing in dividend stocks is never a bad idea, but at times when the capital gains tax rate is favorable, growth stocks provide a better reward for investor capital. But when long-term capital gains tax rates go up, those gains can get expensive.

In this special presentation, we’ll give you seven stocks that have a nice dividend yield and a strong story to go along with them.

View the "7 Stocks That Could Benefit From a Capital Gains Tax Hike".


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