What to Do If You Lose Your Job
Don't wait—take action!
Anyone can lose a job, for a variety of reasons, at any time. If you find yourself in this situation, you don't have to sit idly by. Take these seven steps right away to help ease the financial pain.
Step 1: Review your severance package before you sign.
According to federal law, you have 21 days to sign a severance deal (and seven days after that to change your mind). You may be able to negotiate a better deal, particularly if you're an experienced manager or an executive-level employee.
Be sure you understand the terms. Are you giving up any rights? Are you signing a non-compete clause that may limit your options for finding a new job? Look online for some guidance or talk with an attorney.
Step 2: Apply for unemployment.
The federal/state unemployment compensation program covers almost all wage and salaried workers. If you find yourself out of work through no fault of your own, you probably qualify. Eligibility and benefits vary from state to state, so contact your state for details. Typically, your benefit depends on your recent earnings. It's also important to note that unemployment income is taxable.
NOTE: Under the American Recovery and Reinvestment Act (ARRA), the first $2,400 of unemployment benefits an individual receives in 2009 are tax free. This provision applies only to benefits received in 2009: Normally, unemployment benefits are taxable.
Step 3: Take advantage of your COBRA rights.
Most workers can continue to be covered under their employer's health insurance plan for up to 18 months after being laid off, thanks to the COBRA
legislation of 1986. Most states have mandated an extension of that. For instance, California allows you to continue coverage for an additional 18 months.
NOTE: Under new legislation, if you lose your job between September 1, 2008, and January 1, 2010, the federal government will subsidize 65 percent of your COBRA premium.
Step 4: Roll over your 401(k) account.
When it comes to preserving your retirement savings, you have several choices. You can:
- Make a direct transfer of your entire account balance to a . This way your money continues to grow tax-free.
- Get a check from your former employer and roll this over to an IRA. In general, this isn't a good idea because your employer will be forced to withhold 20 percent for prepayment of federal income taxes. If you're under 59 ½, you must do this within 60 days or you also will be charged a 10 percent penalty. State income taxes and penalties may also apply.
- Leave your money with your former employer. You'll still be tied to the investment choices in your former employer's plan, but you won't have to pay taxes or penalties.
- Cash out. If you just take the cash, you'll owe taxes on the entire amount, plus potential penalties depending on your age.
This is an important decision, so weigh the pros and cons
of each choice carefully.
Step 5: Create a budget, and cut your spending.
First figure out what you're going to live on while you look for a new job. Severance pay? Your spouse's income? Unemployment benefits? Your emergency fund?
Then take a look at your spending. Some expenses are necessities, like rent or mortgage, utilities, and insurance. But there are usually plenty of ways to reduce your outflow while you're searching for a new job. The monthly budget planner
can help you.
Step 6: See if you qualify for other forms of assistance.
There are several tax benefits that might be available to you, from tax credits to the 0 percent capital gains and qualified dividends rate if your income is low enough. Check with your former employer, a tax professional or go to IRS.gov
Step 7: Look for a job!
Start your job search right away. If there are few opportunities in your current industry, work on applying your skills and experience to another one. Take a part-time job. Freelance for a while if that's an option. The more initiative you take, the greater your chances of finding a new job.
Plan ahead! If you think your job may be at risk, start storing up extra cash now to create an .
The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.