Changing Jobs: Fine Tune
Your Financial Plan
Starting a
new job can be an exciting experience. But as you look forward to a new career
challenge, you should consider carefully how you will manage your finances
while making the transition from one employer to another.
When you leave
a job, your employer-provided benefits generally come to an end, unless you
take action to have them continued. While you will likely receive benefits from
your new employer, they may not be identical to the benefits your previous
employer provided. Before leaving your job, think about whether there are
certain benefits you want to take with you. If you have accumulated money in a
401(k) or similar retirement account, you will also have to decide how to
handle those funds.
Keep Insurance Up-to-Date
If the
employer you are preparing to leave provides you with health insurance, you
should consider your options carefully before canceling your coverage. Your new
employer may not offer medical insurance, or there could be a waiting period
before health coverage begins. The new company’s plan may also exclude coverage
of certain pre-existing conditions. If both employers offer health plans,
compare the cost and coverage levels of both policies before making your move.
Under a
federal law known as COBRA, you are permitted to remain a member of your
previous company’s health plan for up to 18 months after termination of
employment. Because you are responsible for paying the employer’s contribution
to the insurance, COBRA premiums are usually expensive. But, depending on the
coverage available from your new employer, COBRA may be your best choice for a
limited time period.
You may
also have the option of converting some other types of insurance that you have
with your current employer into individual policies. Depending on the group
plan, you may be permitted to convert life insurance, disability income
insurance, or long-term care insurance when leaving your job.
Managing Retirement Plan
Rollovers
If you have
money saved in your current employer’s 401(k) or comparable retirement account,
you will have the choice of reinvesting, transferring, or cashing in the funds.
To keep
your retirement savings on track and to avoid paying taxes, you may want to
consider rolling over the funds into another qualified retirement savings
account, such as a rollover IRA. It is essential, however, to do this
correctly. If you fail to roll over your savings into the new account within 60
days after the distribution, you will become liable to pay tax on the funds,
and sometimes a penalty. Taxes will also be owed if your previous employer
makes the distribution check payable to you, instead of to a trustee of an IRA
or qualified plan.
There are
alternatives to the rollover IRA. Depending on your circumstances, you may want
to roll over your money into a Roth IRA or use the funds to purchase an
annuity.
Another
option is to transfer your funds from your previous employer’s retirement plan
into your new company’s plan. In some cases, however, it may make sense to
leave the funds where they are. Find out whether one or both plans place
restrictions on these options.
It is, of
course, possible to take the funds in your 401(k) account as a cash
distribution. For most people, however, it is better to resist this temptation.
When cashing in, you will take a large tax hit and be forced to pay an
additional 10% penalty if you are under age 59½. Moreover, you will forfeit the
long-term benefits associated with tax-deferred earnings, making it more
difficult for you to accumulate later the resources you will need in
retirement.
How you
handle these issues when changing jobs can have a major impact on your
financial future. Before making important decisions, you may want to discuss
your individual circumstances with benefit administrators at both companies and
seek advice from your financial professional.
Source:
Liberty Publishing
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