While finding another job may sit at the top of your list, there are other tasks you will also want to prioritize. They generally fall under cutting spending, budget, insurance, retirement, and taxes.
1. Inventory Your Financial Situation
The most obvious activity you should engage in is to cut excess spending and immediately rework your budget. Taking action will help you combat any negative feelings so you can focus on finding your life’s next big adventure. To get started, take an inventory of your financial situation:
- When is your last paycheck?
- If you are furloughed, what benefits are still available to you until you return to work?
- Will you be paid the balance of your PTO/Vacation?
- Do you have company stock in your 401(k)?
- If you have an executive deferred compensation plan, do you remember the payout?
- Do you get job-hunting support such as outplacement or resume writing?
- Have you updated your resume and social media?
- Did you connect with your work contacts for references?
- Review any non-compete, NDA, or other documents you may have signed.
Try to leave your company on positive terms. You never know if you will need help from your company or a former boss or teammate in the future.
2. Take an Honest Assessment of Finances
Using a budget, once you assess how much money you will receive you will have a better idea if you can meet your necessary expenses.
- Crunch the numbers. Raw numbers enable you to determine which pieces of your budget are optional and which are not. Your necessary expenditures include home payments, utilities, taxes, medical care, insurance, food, auto-related bills, internet, and phone. Discretionary spending that can be cut includes entertainment, dining out, travel, clothing, recreation, hobbies, luxury items, and gifting.
- Assess income. Consider all sources of income including severance package, accrued vacation, and sick time pay. If you are eligible for unemployment benefits or government programs, it may also help you augment your income while you search for a new job.
- Consider savings. If you heeded recommendations on creating an emergency fund, your budget may require you to tap into your savings.
- Contact creditors. Some creditors may offer short-term hardship programs that can significantly reduce your payments over a specific period.
- Student loans. If you are still paying back student loans, reach out to your student loan servicer so you can discuss any repayment options available.
3. Consider Your Available Health Insurance Options
Health insurance may be one of the largest considerations while you are out of work. You may have several options to carefully consider:
- Meeting healthcare needs. If possible, make your necessary doctor’s visits before you separate.
- Prescriptions. Check out prescription discount apps to find your prescriptions for the lowest cost, as well as coupons.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that allows an employee with a qualifying event—such as a layoff or a reduction in work hours—to continue with his or her employer’s group health insurance plan for up to 36 months. Contact your human resources department to find out the details of your other insurance policies.
- Length of Coverage. You will want to know how long coverage will last, such as through receiving severance payouts.
- Portability. Find out if can transfer a group policy into an individual policy.
While continuing your health insurance coverage through COBRA may be expensive, paying for an uninsured medical emergency can be catastrophic. Be sure you understand how much COBRA will cost you and your family since it is likely you will have to pay the full premium.
Alternatives to COBRA
Spousal insurance. Under the Health Insurance Portability and Accountability Act (HIPAA), you can enroll in a spouse’s employer-provided health insurance plan without waiting for the next open enrollment period. You have a 30-day special enrollment period that begins on the date you lose your own health insurance. If you can switch to your spouse’s insurance, start that process right away.
Affordable Care Act (ACA). Under the ACA, the federal government—and some state governments—established a health insurance exchange. If you lose your job, you have a 60-day special enrollment period to find health insurance through the exchange. Information about the federal Health Insurance Marketplace and the availability of income-based premium subsidies is available at www.healthcare.gov. You can find specific information for each state by visiting www.healthcare.gov/marketplace-in-your-state/. Eligibility for premium subsidies will depend on whether your income falls below a certain threshold.
Medicaid expansion. Individuals without any income may be eligible for Medicaid if their state of residence adopted Medicaid expansion under the ACA. Eligibility for Medicaid will vary with income and family size, and 14 states have not expanded their Medicaid program under the ACA: Alabama, Florida, Georgia, Kansas, Mississippi, Missouri, North Carolina, Oklahoma, Tennessee, Texas, South Dakota, South Carolina, Wisconsin, and Wyoming.
Short-term health insurance plans. A short-term health insurance plan may provide coverage for up to 36 months. Be aware that short-term health insurance plans are not required to cover all services or prescription drugs. In addition, because state law regulates health insurance, short-term plans are not available in every state. In 2020, short-term health insurance plans are not available in California, Colorado, Connecticut, Hawaii, Maine, Massachusetts, New Mexico, New Jersey, New York, Rhode Island, and Vermont.
Health Savings Account (HSA). You may consider using your health savings account (HSA) to pay health insurance premiums while unemployed. Your HSA is portable and remains with you after your employment ends.
According to IRS Publication 969, tax-free qualified distributions from an HSA include COBRA premiums, premiums for health coverage while receiving unemployment compensation under federal or state law, and premiums for long-term care insurance. Also, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded the definition of qualified medical expense to include over-the-counter medications.
4. Determine How Your Situation Changes Your Retirement Planning
You will likely need to tackle your company-sponsored retirement plan and any additional executive programs you may be part of.
Retirement Plans. Determine what portion of the contributions your employer made to your employer-sponsored plans that are vested. Then, decide how you will manage these assets after your departure. You have several options:
- You can move your plan assets to an individual retirement account (IRA)
- If permitted, you can leave your retirement account with your old employer
- Your employer may withhold a percentage of taxes and there may be fees
Read more about rollovers here.
Assess Other Benefits. If you have executive benefits or nonqualified deferred compensation, be sure you understand your options and how to exercise them:
- Stock Options. Determine the value of any vested stock options and how to exercise them, such as accelerated expiration schedules. Request a current grant sheet from your employer. This will help you evaluate the financial and tax impact of exercising your options.
- Net Unrealized Appreciation. You’ll need to consider what this means to you if you have company stock in your 401(k).
- Non-Qualified Deferred Compensation. Assess your non-qualified deferred compensation options since many plans require a lump-sum distribution, which could impact your taxes.
Borrowing. If you borrowed from your 401(k), it’s important to understand how these loans work:
- Your plan may require full repayment of the loan within 60 days if you lose your job. If you cannot repay the loan, it may be considered defaulted.
- There is likely no flexibility to change the loan repayment terms.
- If you default on your loan, the unpaid portion will be treated as an age-based distribution, subject to ordinary income tax, as well as a potential early withdrawal penalty.
5. Consider your tax situation for the rest of the tax year
A proactive tax plan now can save you from surprises when you file your taxes in the following year. If you are not able to replace your income for the next several months, or even the rest of the year, consider what your tax outlook will be:
- IRA vs. Roth. Consider converting IRA money into a Roth IRA which may allow you to preserve the tax-favored status of those assets and avoid early withdrawal penalties.
- Capital Gains. Do you have capital gains that could be taxed at a lower tax bracket?
- Cashing Out. Will cashing out stock options or Restricted Stock Units move you into a higher tax bracket?
- Unemployment. Will you collect unemployment? If so, you may want to elect to have taxes withdrawn depending upon your situation.
- Deductions. Consider what you can deduct for the year and if they will lower your tax liability.
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