If you made a New Year?s resolution to find a new job this year, you might have a good chance of making a switch. Employers in all major industry sectors are expected to increase hiring in the first quarter of the year, according to the most recent ManpowerGroup Employment Outlook Survey.
Landing a new job can be a good way to get a pay boost. Research by the Federal Reserve Bank of Atlanta shows that over the past several years, the wages of those who switched jobs grew at a faster rate on average than those who remained at their jobs.
However, you need to weigh more than just salary when switching jobs. Following are seven steps to prepare your finances and avoid costly mistakes.
MAINTAIN A HEALTHY EMERGENCY FUND
You should have cash in savings before you make a job switch. Transitions don?t always work exactly as you expect them to, and sometimes they drag out or surprise you with some unforeseen costs, said Andrew McFadden, a Fresno, Calif.-based certified financial planner and founder of Panoramic Financial Advice. An emergency fund will provide the financial cushion you need.
Ideally, you should have enough in savings to cover three to six months? worth of expenses, he said. If you have credit card debt, though, focus on paying it off before fully funding an emergency fund.
?All the interest you?re paying is an expense you really don?t need,? McFadden said. ?Make sure your card balances are at zero and that you have an emergency account, and you?ll be ready for just about anything life throws you during this transition.?
If your former employer is reimbursing you for unused vacation or sick time, roll the extra money into your emergency fund, said Stephen Alred, Atlanta-based director of advisor success at XY Planning Network. You might also need to cut some everyday expenses and trim monthly bills to have more cash to pay down debt and create your emergency fund.
MAINTAIN YOUR HEALTH COVERAGE
Health insurance is something you can?t afford to be without, McFadden said. Plus, in most situations, you will have to pay a penalty under the Affordable Care Act if you don?t have health coverage. So find a way to stay covered if you leave a job without having another one lined up, or if you have a gap before coverage through a new employer kicks in.
?Your best option is likely to just add on to your spouse?s coverage,? McFadden said. ?If that isn?t an option, you?ll want to seek COBRA coverage through your now-former employer.? COBRA ? the Consolidated Omnibus Budget Reconciliation Act ? gives workers the right to continue their health coverage through their former employer after a job loss or when transitioning jobs. However, you might have to pay up to 102 percent of the cost of the plan.
If COBRA coverage is too expensive, look for a plan through the Obamacare health insurance marketplace to bridge the gap to your next employer, McFadden said. You have up to 60 days after losing your health coverage to enroll in a marketplace plan.
DON?T CASH OUT YOUR 401(K)
Studies have shown that when changing jobs, too many workers cash out their 401(k) plans instead of rolling them into a new employer?s plan or an IRA, said Neil Gilfedder, vice president of portfolio management at Financial Engines, an independent investment advisor. ?This is a big mistake,? he said.
Cashing out your 401(k) or workplace retirement plan when switching jobs might seem like a way to tide you over until you get a paycheck from your new employer, but you?ll end up losing money in the process.
?If you?re younger than 59 1/2, you?ll wind up paying a 10 percent federal early withdrawal tax penalty,? Gilfedder said. Plus, you?ll have to pay taxes on your withdrawal at your ordinary income tax rate.
DECIDE WHETHER TO TAKE YOUR 401(K) WITH YOU
If you don?t cash out your 401(k), you can decide whether to roll over your old plan?s balance into your new employer?s plan, or into an IRA. Or, you might want to leave the money in your old plan if your former employer offers this option, Gilfedder said.
Compare the investment options and fees in your new employer?s plan with those in your former employer?s plan. ?If your new employer offers a good range of investment options with lower fees, you might want to consider rolling over your old plan into the new one,? Gilfedder said. ?If your previous employer?s plan was better, consider either leaving your account there or rolling it into a low-cost IRA.?
Be aware that you can?t continue to make contributions to a 401(k) with a former employer. If you opt to roll over the balance into your new employer?s plan or into an IRA, make sure the funds are transferred directly to the new account rather than distributed to you. Fail to do so, and you might end up paying taxes and a 10 percent penalty on the distribution.
GET YOUR NEW EMPLOYER?S MATCH
If you have a life insurance or disability insurance policy through your employer, find out what will happen to that coverage when you leave your job. ?Some companies offer a portability feature with their life and disability policies,? Alred said. ?This means that when you leave, you can convert your policy to a personal policy instead of having to start the long process of getting insured.?
If you can?t convert your policies, use your job change as an opportunity to explore getting your own policies. Your new employer might not offer life or disability insurance. Even if it does, it might not be enough coverage. Plus, you could lose employer coverage the next time you switch jobs.
You can use the calculators at a website such as LifeHappens.org to figure out how much life and disability insurance you need.
MAINTAIN LIFE AND DISABILITY INSURANCE COVERAGE
If you have a life insurance or disability insurance policy through your employer, find out what will happen to that coverage when you leave your job. ?Some companies offer a portability feature with their life and disability policies,? Alred said. ?This means that when you leave, you can convert your policy to a personal policy instead of having to start the long process of getting insured.?
If you can?t convert your policies, use your job change as an opportunity to explore getting your own policies. Your new employer might not offer life or disability insurance. Even if it does, it might not be enough coverage. Plus, you could lose employer coverage the next time you switch jobs.
You can use the calculators at a website such as LifeHappens.org to figure out how much life and disability insurance you need.
CONSIDER YOUR TAX SITUATION
If you are off work for an extended period of time, you might have a significantly lower level of income for the year, McFadden said. This can create opportunities for tax savings.
For example, if you drop into a lower tax bracket, consider taking advantage of a lower tax rate to convert a traditional IRA to a Roth IRA, McFadden said. You?ll have to pay taxes on the amount you convert, which is why it?s better to convert when you are in a lower tax bracket. However, you won?t have to pay taxes on Roth IRA withdrawals in retirement ? when your tax rate might be higher after years of income growth.
?You also might find yourself with low enough income to sell some of your investment holdings at a 0 percent capital gains rate,? he said. ?The lower your income, the more potential possibilities.? McFadden suggested consulting a tax professional or financial planner for help.
Taking these steps will help prepare and protect your finances in the event of a job switch. That way, you?ll be able to focus on impressing your new boss rather than dealing with financial distractions.
(Source: TNS)
