After a job ends, sort out your final paycheck, unemployment eligibility, minimum monthly spending, and health coverage. Don't cash out your 401 (k); roll it over directly instead, and if you switch to contract work, build self-employment tax into your rate.
Leaving a job is rarely easy. Whether you're moving on to an exciting new role or you were let go, you have to weigh up the financial implications of career transitions. Whichever way you look at it, career transitions put pressure on cash flow.
Career Transitions: What to Handle in the First Two Weeks
Confirm your final paycheck with your payroll. Make sure your final paycheck includes any unused vacation payout, and learn a clear date when your employment benefits actually end.
Check your eligibility for unemployment benefits. Rules can vary by state, and being laid off does not guarantee you qualify.
Don't touch your retirement savings. Cashing out of a 401(k) before age 59 and a half generally triggers income tax plus a 10% early withdrawal penalty, which is usually not worth it.
It's better to get the cash to cover your expenses from another source.
You'll need to work out your actual monthly minimum spend. That will include the following:
- Housing
- Food
- Insurance
- Minimum debt payments
When all these are added together, that's the number that will determine what you need for the next few months.
Health Coverage and Deadlines
Losing job-based coverage is considered a qualifying life event, which opens a special enrollment period for health insurance. COBRA lets you keep your existing employer plan, but you pay the full premium plus an additional administrative fee.
Generally speaking, this adds up to far more than you were paying as an employee. According to HealthCare.gov, you should compare your options before defaulting to COBRA, since a subsidized marketplace plan is often cheaper when you're left without income.
Protecting Your Retirement
You generally have four options for an old 401(k):
- Leave it where it is
- Roll it into a new employer plan
- Roll it into an IRA
- Cash out
According to the IRS, a direct rollover moves the money between institutions without it passing through your hands, so nothing is withheld. An indirect rollover gives you 60 days to redeposit and withholds 20% up front, which is why the direct route is preferable to withdrawing what's already invested.
Income Planning for Contract Work
When you move into an independent contractor arrangement, you become responsible for quarterly estimated taxes. Self-employment tax applies on top of income tax. Effective income planning means building the tax portion into your rate from the start.
Once you've covered the immediate months, your career change plan becomes a longer-term question, and you should look into long-term wealth planning.
Let's say you just moved to Washington for a higher-paying career. A wealth management firm in Vancouver, WA, can help you model the trade-offs for your financial plan.
Building a Long-Term Financial Strategy
Neglecting to figure out your long-term plans during career transitions can do more financial damage than short-term issues. It's not just about earning the most money.
Without a solid financial survival plan for the first few months, you might struggle to balance the books. Once you settle in, a considered financial strategy matters more than working it out alone.
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