“Statistics indicate that 56% of all U.S workers are currently interested in switching to a new career, and it’s not surprising that midlife workers have had a big impact on this number," says Alex Simon of CAREEREALISM
In today’s fast paced, digitally connected world, we are changing jobs at a more rapid pace. Whether you are seeking a new challenge, higher pay, or a better work environment, make sure you consider how your job change will impact these financial aspects of your life.
Consider the impact on your life insurance
Several employers offer life insurance coverage, and sometimes long-term disability, as an employee benefit. The coverage is typically 1x to 2x your current salary. Your new benefits package may not include life insurance, which will leave you with the homework of securing new coverage if your financial situation warrants it (i.e. you have minor children, a mortgage, tax planning needs, etc.). Several plans offer you the option to continue your existing life insurance coverage with the caveat that you will now be responsible for the premium. Work with your old HR department and your new HR department to understand your options while you still have coverage.
Take this time to review your health insurance plan
Changing jobs qualifies you for a Special Enrollment Period under most health plans, as well as on the Health Insurance Marketplace (www.healthcare.gov). Typically, you can only sign up for a new plan or make changes to your existing plan during the Open Enrollment Period (November through January). A change in jobs qualifies you for a Special Enrollment Period that allows you to sign up at the time you lose your old coverage. If your spouse’s employer offers a family plan, it is important to understand the plan benefits as well as the premium. Opting for coverage under your spouse’s plan might be a great choice if your new employment opportunity does not include health insurance. Another option is to sign up for a health plan on the Health Insurance Marketplace. As a last resort, you may be able to keep your existing coverage under COBRA. COBRA is a federal law that can allow you to retain your current coverage for up to 18 months. However, the premiums will increase dramatically. Before deciding COBRA is your best option, I would spend some time on the Health Insurance Marketplace to see if a new plan offers more affordable coverage.
Understand your options for your 401(k)
I know it is tempting– you are leaving your job and could use the cash, so you are considering cashing in your 401(k). Don’t! It is almost always a poor financial decision to use 401(k) funds, or any retirement savings, to support today’s living expenses. You should view your 401(k) and other qualified accounts like 403(b)’s, IRAs, and ROTH accounts as retirement capital. Those funds already have a very important purpose – setting you up for a secure retirement. If you need more reasons not to cash out a 401(k), consider the mandatory 20% withholding you will pay, and the extra income taxes you may be responsible for when you file your taxes. In addition, if you are under 59 ½, you will be subject to a 10% early withdrawal penalty courtesy of the IRS. Your best bet may be to roll over the funds to either an IRA or your new employer’s 401(k) but be sure to consider all your options.
Read more about this topic in our recent post
Visit with your tax advisor or CPA
Your source of employment typically dictates how you pay your taxes. For example, if you are a salary employee, you are likely subject to federal withholding. Your employer withholds federal income taxes from each paycheck and remits them to the IRS on your behalf. We refer to this as “W2” employment since you will receive a W2 at tax time that lets you know how much has been withheld from your income to cover your tax liability. As a W2 employee, your involvement with taxes occurs one time a year… when you file your tax return. However, if you are a contractor or are self-employed, you have to make estimated tax payments quarterly and keep a tax projection to ensure you don’t have a tax penalty at year end. You may also be subject to self-employment tax. If you are leaving a W2 position for an opportunity where you will be paid as a contractor, be sure to consult a tax professional to understand how your tax situation is changing.
Use this time to make any needed changes to your Financial Plan
A change in jobs brings about a great opportunity to reassess your short term and long term financial goals. Do you have a retirement plan? Are you close to reaching your goals? Are you on the right path, or is now a great time to make a shift in your planning? A job change is a perfect opportunity to contact a financial planner to help assess your financial goals and determine if you need to make any changes. The insight of a CERTIFIED FINANCIAL PLANNERTM professional may put you at ease about the upcoming transition and help make sure you stay on track to meet your long term goals.