4 Steps to Take Immediately After a Job Loss
If you’ve recently lost your job due to being laid off, chances are good you’re juggling a lot. You’re likely sending out your resume, catching up on at-home tasks and networking — all while processing your emotions resulting from this sudden change. But have you considered how this change will affect your healthcare and plans for retirement? Following are four steps to take immediately after a job loss.
Step #1 – Review your employer-sponsored retirement plans
You’ll want to review your current employer-sponsored retirement plans to make sure you’re accounting for all your assets. It’s important to then consider the pros and cons of rolling your 401k into an IRA.
If you’re age 55 or older, you’ll want to be aware of the IRS’ “rule of 55.” Usually there’s a 10% penalty — on top of any taxes you owe — when you withdraw money from your 401k plan early. However, so long as you turn 55 (or are already older) during the calendar year you leave or lose your job, you can begin taking distributions from your 401k without an early withdrawal penalty. However, it’s important to note that you must still pay taxes on your withdrawals. And the “rule of 55” doesn’t just work for 401k plans — it can also apply to other qualified retirement plans (such as a 403b). You can verify whether you’re able to use this exception by referencing the Summary Plan Description for your workplace retirement plan.
For those who have a pension benefit through their employer, you may be able to opt for a lump sum rather than receiving payments over time. But there are significant tax and income repercussions to your decision, and each situation should be analyzed individually. Proper consideration of tax efficiency should be considered prior to taking money out of any of your investment accounts. Be sure to consult with your financial and tax advisor on your unique situation.
Step #2 – Analyze your loss of company benefits
When losing a job, you’re not just losing your income stream or sense of identity — you’re also losing tangible benefits you’ve been counting on. Make sure you pay particular attention to your health coverage and stock options, as noted below.
Health Coverage
- If you lost your job before age 65, there will likely be a gap between your private health insurance and Medicare eligibility.
- Some larger corporations may provide extended coverage, depending on your age and length of service.
- COBRA may be a great option and can potentially bridge the gap to age 65, but weighing all your health care options is important. Your options include:
- COBRA – COBRA provides you and your family with up to 18 months of healthcare coverage. However, this coverage can often be very pricey, as most employers cover a significant portion of healthcare expenses for their employees, and on COBRA you’re now paying 100% of expenses plus administrative fees.
- Spouse’s coverage – Does your spouse still have coverage through their employer? If so, joining their plan could possibly save you thousands over COBRA.
- Marketplace – Engage with a health insurance consultant or service to help vet the many marketplace options out there to find one that best suits your specific needs.
Stock Options
- Be sure to understand the terms of your stock option plan or engage a professional who can help you analyze the contract.
- Upon separation, there’s usually a limited amount of time to exercise the remaining stock options. In addition, vesting schedules may change. Weigh these new circumstances with your own cash needs, tax implications and long-term planning initiatives.
- Job layoffs often go hand in hand with your former company’s stock price fluctuation. Consider the tax consequences of exercising any stock options before making a move.
Step #3 – Remember to account for taxes
Taxes are involved with more consequences of job loss than you might think. After creating a new budget based on your new cash flow, you’ll want to do the following:
- Understand payouts from retirement accounts may begin upon separation from the company.
- Document all job search expenses and travel for potential future tax deductions.
- Be sure to sell your holdings strategically if immediate cash is needed. Capital gains taxes (from selling an asset in a brokerage account), income tax and possible penalties (from withdrawing funds from a retirement plan) will be significantly different for each individual based on their unique situation, holding period, age and income level.
- Consider tax-loss harvesting your brokerage holdings with losses, as this action could possibly counteract the tax repercussions of a severance package. These losses and subsequent carryforwards could possibly provide substantial tax savings while keeping you in the market.
Step #4 – Contact your financial advisor
Your financial advisor should be one of your first calls after being laid off, as they can help you make any necessary adjustments to your strategy and investments to help ensure your financial plan continues to meet your ever-evolving needs.
If you don’t yet have a fiduciary financial advisor, now’s a great time to start working with one. During this time of financial and emotional strain, it can be reassuring to have a trusted professional in your corner who listens to your concerns and puts your best interests first.
At Creative Planning, we take pride in our ability to assist those navigating difficult transitions so that they can focus on the next step in their journey. Whether you’re focused on finding your next career opportunity or looking to retire all together, schedule a no-obligation meeting for help getting — or keeping — your finances on track.
