Financial considerations when you lose your job
Earlier this month, ACM CIO and Founder Partner Charles Lieberman commented on January’s red hot jobs report and what that might mean for interest rates and the possibility of the Fed maneuvering a soft landing for the economy. The January jobs report information was counter to a lot of recent attention-grabbing headlines about companies laying off workers. Zoom announced that it was eliminating 15% of its workforce, a sizable percentage though nowhere close to the total numbers in the tens of thousands announced by Tech giants Alphabet, Amazon, and Microsoft. Tech is isn’t the only industry right sizing, with layoffs announced at chemical giant Dow Inc., Disney and 3M as well.
There seems to be a disconnect between the layoff headlines and the most recent jobs report announcement. The unemployment rate tends to be a lagging indicator, so we’ll see if these layoffs result in a drastic change in the unemployment rate for February.
If you or anyone you know is concerned about the stability of their job moving forward, there are a few major financial items that you need to consider should you unfortunately find yourself on the wrong side of this recent trend.
Retirement Plans
It’s important to make sure you do not forget about the benefits that were provided at your old job. First and foremost is your 401(k). Changing jobs provides the opportunity to rollover your 401(k) to an IRA where you will have a wider range of investment options and can continue to invest the assets in a tax-deferred manner.
Before rolling over your 401(k), you will want to check with your plan administrator to see if you have made any after-tax contributions to your account. If so, you can roll over the after-tax contribution amounts to a Roth IRA without paying taxes, as long as certain rules are met. Rolling over 401(k) assets to an IRA without identifying the after-tax contributions means that you may end up paying taxes twice on those assets (upon contribution and withdrawal). Not knowing what your after-tax contributions are can also complicate future elective Roth conversions that you may want to implement down the road for tax planning purposes.
If you are over the age of 55 but not yet 59 ½, you may want to hold off on any IRA Rollovers if you’re not sure what your next move will be and you may be looking for new employment for some time. Known as the “The Rule of 55”, this rule allows workers who leave their job for any reason, including a layoff, to start taking penalty-free distributions from their employer’s retirement plan once they’ve reached age 55. To avoid a 10% penalty for withdrawals from an IRA, you have to be 59 ½ or older. The Rule of 55 can be a lifeline for those who need cash flow as they look for new employment and don’t have other good alternatives
If you are over the age where Required Minimum Distributions (RMDs) begin (now age 73) and plan on returning to work, then you are likely better off rolling your 401(k) assets into your new employer’s 401(k) plan once you do find employment. Doing so will allow you to avoid taking RMDs until April 1stin the year after you retire, thus avoiding the additional income tax RMDs create above and beyond the wages you are continuing to earn.
If you own company stock in your 401(k) that you may have purchased a long time ago at a low cost, then you may want to consider distributing that stock directly to a taxable account instead of an IRA to take advantage of Net Unrealized Appreciation (NUA). NUA is the difference between the cost basis of your company stock and its market value. You can pay capital gains tax (instead or ordinary income tax) on the NUA of your employer stock if you follow certain rules.
You’ll still have to pay taxes at ordinary income taxes on the cost of your shares when you make an NUA election, so it may or may not make sense to do so unless you have a near-term need to spend some or all of the proceeds from selling your employer stock. There are pros/cons to electing NUA and you should have a conversation with your ACM Wealth Advisor and tax professional before making this election.
When you do find new employment, you will want to ensure you enroll in the new employer’s retirement plan as soon as possible to take full advantage of an employer match, if one is provided. In addition, enrollment in the new plan is a good time to review your asset allocation, how much you are saving for retirement, and if you can increase that amount if you budget allows.
Finally, you should ensure that you review and update who you’ve named as primary and contingent beneficiaries on your retirement plans. If you are married, federal law states your spouse will be the beneficiary. If you would like assets to go to someone other than your spouse, then your spouse is required to sign a waiver approving the designation.
Stock Options
Aside from any retirement savings plans you may be participating in, you may also have stock options or other forms of equity compensation from your previous employer. When leaving a company, generally those stock options that are unvested will be lost, and those that are fully vested are available to you, but the window to exercise might be just 90 days. With severance arrangements, an accelerated vesting may apply for unvested options along with a short window to exercise options or sell your newly vested shares. It’s critical to speak with Human Resources as well as your ACM Wealth Advisor to understand your company’s rules and to determine what action needs to be taken.
Health Benefits and Savings Plans
If you have a gap in health care coverage between employers, make sure you understand the COBRA coverage that is offered to you. You have 60 days from your termination to elect COBRA coverage, which continues your current medical coverage at the full cost to you without your former employer subsidizing the premiums. A qualifying event, like a separation of service from an employer, allows you and your family to maintain coverage for COBRA for up to 18 months. Even though COBRA premiums may be more expensive than your employer coverage, COBRA allows you to maintain your health insurance. Electing COBRA also buys you some time to either look for cheaper alternatives via the Federal Marketplace at HealthCare.gov or to replace it with new employer coverage when you find a new job.
If you are over age 65 and lose your job at a large employer (20+ employees or more), then this will also open up a special enrollment for Medicare, which allows you to obtain a Medicare Supplement Plan with guaranteed insurability (or you can choose a Medicare Advantage plan). Either traditional Medicare or a Medicare Advantage plan may be less expensive the electing COBRA. Penalties apply if you do not enroll in Medicare Part B within certain time limits so a conversation with your advisor on this issue is a good idea if you are either over age 65 or you’re approaching age 65.
It’s also important to understand if you had a Flexible Spending Account (FSA) or Health Savings Account (HSA) (or maybe both), then you can use those accounts to pay for COBRA. You cannot use an FSA to pay for a Marketplace/healthcare.gov plan, but you can use your HSA. These plans provide tax-advantaged ways to save and pay for healthcare costs and could prove useful if you are concerned about your cash flow while looking for future employment and want to maintain health insurance coverage for you and your family.
Life and Disability Insurance
Many employers offer group disability and life insurance coverage to their employees. While it’s common that these benefits generally do not offer adequate protection by themselves, it’s also important to understand what you may be losing along with your job. For instance, if your previous employer provided a life insurance benefit of 5 times your salary, then you may want to add a private policy to replace this coverage to continue to protect your family. Obtaining life or disability insurance on your own also eliminates reliance on your employer’s coverage if/when your employment situation changes in the future (and it can be cheaper if you are particularly healthy). A new employer may or may not offer similar insurance coverage, but if so, then any private term life insurance can be terminated if it turns out that your new employer offers a better solution.
Also remember to designate appropriate beneficiaries for your life insurance policy(s).
Moving Out of State
Finally, if your search for a new job is taking you out of state (or you’re finding major differences in the pay scale you were previously accustomed to), then this could result in significant changes to your personal income taxes. A domicile change might place you in a higher or lower tax bracket and you should ensure that your ACM Wealth Advisor and your tax advisor are on the same page so they can adjust any previously discussed tax planning accordingly.
Hopefully, the above provide some food for thought when it comes to anyone you know who may have lost or is in danger of losing their job. It’s a bit more detailed than you may originally have thought and the above does not consider the basics or how much you may have set aside as an emergency fund, your ongoing budget, whether or not it makes sense to borrow against or take withdrawals from retirement funds and any debt you may have.
It also may be difficult to focus on these details for those whose primary focus is getting a new job. Understanding that job loss can be stressful and that we tend to not make the best decisions under stress, having a conversation with an advisor who understands these details can be one of the smartest decisions you can make.
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