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Changing Jobs?
Stay On Track
Keeping your financial plan intact through
a career change
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Business New Haven
7/14/97
By: BNH
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According to the most recent statistics, the average American employee will change jobs at least five times. Switching jobs- whether you're leaving your positions because you've found a new one or you've been “downsized” out - can have a significant impact on your current and future financial health. It's important to take the time to negotiate your leave-taking so that you may maximize any severance pay due you and carefully coordinate your benefits.
Maximizing a Buyout
The typical severance package gives you a week or two of pay for each year of service. But it's possible to negotiate your way to more. If you are offered severance, ask to see your company's formal severance package; then find out what former co-workers in similar situations were offered. Knowing a company's policy and how others have been treated may help you obtain a better offer.
Some companies give workers a choice between taking severance pay in a lump sum or spreading it over a period of weeks or months. Although cash is worth more up front, by receiving regular payments over time, you may be able to continue receiving full benefits such as health insurance.
Protect Retirement Funds
In most cases, when you leave a job you have three options about what to do with your 401(k) or other tax sheltered retirement money. You can leave your money in your old employer's plan, transfer it to your new employer's plan, or roll it over into an Individual Retirement Account (IRA). Whichever you decide, be sure to vest all of your retirement funds. Generally, if you withdraw any funds before you reach age 59 and a half, you'll pay a ten-percent penalty plus income taxes on the amount withdrawn.
Your former employer must permit you to keep your retirement money in the 401(k) retirement plan you set up through the company, provided you have more than $3,500 in the account. You won't be allowed to make any additional contributions, but your retirement funds will continue to grow tax-deferred.
If your new employer offers a 401(k), or if you've decided to manage your retirement funds on your own, you can open a “rollover” or “conduit” IRA. A rollover IRA gives you more investment options than most employer-sponsored plans - a good feature if you're investment-savvy. Otherwise, you might fare better having your old or new company manage your funds.
An important caveat: When you choose to take your retirement funds out of your former employer's plan, have your old employer transfer the funds directly to the new plan's trustees. Should you request a check for the proceeds, your employer must withhold 20 percent for federal income taxes - even if you immediately deposit it in a new plan. Moreover, you are required to replace the 20 percent from your own pocket within the 60 days allotted for a rollover. Otherwise, the amount withheld and not included in your rollover will be considered a withdrawal, and this “withdrawal” will be subject to both taxes and penalties.
Bridge Insurance Gaps
Don't place your family at risk by going uninsured - even for a few weeks. With the cost of health care today, an uninsured illness or surgery can precipitate financial ruin. If you worked for a company with 20 or more covered employees, you'll most likely have the option under federal law (COBRA) to continue your present health insurance at your own expense. In most cases, you pay the same premium your company was paying, plus an administrative fee of up to two percent. COBRA insurance covers you for 18 months; after that, you're on your own.
As a worker who is not eligible for group insurance under COBRA, you may be able to purchase a short-term policy from a national insurer to fill the gap while you shop for a plan that meets your family's needs.
Even if you have a new job, don't assume insurance coverage from day one. Some companies require a waiting period before health insurance becomes effective, and some plans exclude coverage for preexisting conditions for up to 12 months.
Finding out the facts about your health care and other benefits before you switch jobs will help you plan for a more secure financial future. BNH
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The above article was prepared by the Connecticut Society of Certified Public Accountants.
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