Today’s job market is constantly evolving. Unfortunately, that may mean that you are receiving a pink slip and if you are lucky a severance package. Here are some steps to take and things to consider.
- If you are receiving a severance package, set aside the entire amount in a savings account and move over a portion on a weekly/bi-weekly basis to replace the income that isn’t coming in from your paycheck. Psychologically, we treat lump sums of money different than our regular paychecks. The tendency is to mentally spend the same dollar multiple times in our heads. This is why lotto winners often go bankrupt and most inheritances are completely spent within two years. By having a plan and a system, you treat the money differently and improve your chances of making it last.
- Consider what to do with any company stock you may hold. You may mentally be done with your company and want to sell it all immediately but be sure you consult your tax advisor prior to doing so. If you purchased the stock at a discount through an employee stock purchase plan, you may need to hold onto the stock for two years instead of the usual one year holding period to receive long term capital gain tax treatment. Maybe you have Restricted Stock Units that have just vested – you may want to hold onto them for a year to get the long-term capital gains treatment.
- Figure out your health insurance options. Your company will provide you with the option to continue in their group plan for a period of time. This is often referred to as COBRA. (The Consolidated Omnibus Budget Reconciliation Act of 1985). Leaving an employer is also a qualifying event that will allow you to purchase a policy through your state’s Health Exchange. Your spouse may also be able to make changes to their benefit selection through their employer even though it isn’t open season. Check out all your options and costs.
- Figure out what to do with your 401k. When you are in a 401k, you are a plan participant. When you have an IRA, you are an account owner. This means that your former employer is calling the shots when you leave the money in the 401k. They choose the available investment options, they can somewhat restrict how you take your distributions. In an IRA, you are the account owner and get to choose how the account is invested and distributions follow standard Federal guidelines. Before you move the account, there are some things that you should consider – do you have company stock? Do you have after-tax contributions? Are you between the ages of 55 and 59.5? If so, the 401k may have some advantages over the IRA. Not sure what to do? Consult your financial advisor to find out your options.
Being laid off is difficult. Be sure to carefully manage your resources to ensure that you and your family come through this difficult time with the most positive outcomes possible.