Losing a job unexpectedly is bound to leave anyone in shock. Once you get over the initial feelings of stress or even panic, it’s important to take a few steps that will make sure you can get back on track – with life and with your finances. In this week’s Money Minute, I tell you three things to do if you ever get the boot.
Sign up for unemployment benefits. If you’ve lost your job through no fault of your own, you may qualify for unemployment benefits. Every state has its own eligibility requirements, so check your state’s labor department website first. Most states offer 26 weeks of benefits. The key is to apply as soon as you lose your job to ensure you get benefits for each week you’re out of work. Some states allow you to apply online, while others require an in-office visit.
Make a plan for health coverage. You don’t just lose a paycheck when you lose a job — in many cases it also means losing precious health benefits. Thanks to the Affordable Care Act, you can sign up for a new insurance plan through your state’s exchange or the federal marketplace, Healthcare.gov. There’s a special enrollment period specifically for people who’ve lost their jobs. If you want to keep your ex-employer’s health plan, you may be able to sign up for COBRA coverage. COBRA can extend your benefits for up to 18 months. If you work for a very small business, you may be out of luck — COBRA is only offered by employers with more than 20 employees.
Don’t forget about your 401(k). When you switch jobs, don’t forget about your retirement savings. The last thing you should do is empty your account — you could get hit with early withdrawal fees and penalties. If you’re under 59 ½, you may face a 10% early withdrawal penalty. On top of those fees, your plan provider will withhold 20% of your savings for federal taxes. That’s 20% of potential investment gains you’d miss out on.
There’s one exception here, notes Helen B. Stephens, a certified financial planner in Fort Worth, Texas. It’s called the “Rule of 55” , which allows an employee who leaves a job at age 55 to take money out of their 401(k) and avoid the 10% early distribution penalty. You will, however, still have to pay taxes. The Rule of 55 is only applicable to 401(k)s and doesn’t apply to individual retirement accounts.
To avoid fees and taxes, you could do an IRA rollover, where you open an IRA and transfer the funds yourself. Ask your 401(k) plan sponsor to cut you a check that you can deposit in a new account. Note that you’re only allowed one IRA rollover per year if you do it this way. Also, If you’re under 59 ½, you have to deposit that check in a new retirement account within 60 days or face a 10% early withdrawal penalty.
George Papadopoulos, a certified financial planner in Novi, Mich., recommends doing a trustee-to-trustee rollover if possible, especially if you are rolling over more than one retirement account from previous employers. You’re allowed unlimited trustee-to-trustee rollovers. Ask the company managing your plan to do a direct deposit in your new IRA or the 401(k) you’ve set up at your new job.
Another option is to leave the money in your old employer’s 401(k) and avoid fees and taxes as well, especially if you’re unsatisfied with the investment options in your new company’s plan.