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Tony Novak, CPA, MBA, MT
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Changing jobs: what you need to know to preserve financial security
Be prepared to make important decisions about your finances during this time of transition
by Tony Novak, CPA, MBA, MT
Changing jobs means making some decisions about how to handle the transition of you employee benefits. If you do not make the decisions, then the choices will be made for you based on “default” provisions built into the benefit plan itself. The default options may not be in your best interest so it makes sense to invest a little time to understand your options and make the best choices for your own financial situation.
The important topics covered in this article are: 1) health coverage, 2) life insurance, 3) retirement plan, and 4) ancillary benefits.
Health coverage is usually the first and most important issue to be handled after you leave your job. If you are covered under a group health plan, then that coverage continues until the end of the month that you left your job. At that point you should select one of the three coverage options:
COBRA – If you worked for a mid-sized or large company then you have the option of keeping and paying for your same health plan under a federal law known as COBRA. The employer handles the notification and paperwork, you only need to make the election in writing and send the payments on time. This option is the most expensive and should only be used in the event of a serious ongoing medical condition or pregnancy. COBRA is not available to the employees of very small businesses. The Web site COBRAplan.com is a great source of additional information.
Individual conversion – If you work for a small company, COBRA does not apply but you can usually keep your same health benefits simply by calling the health insurance company yourself and requesting an “individual conversion” of your policy. Again, this is very expensive and is used by only a small number of people who change jobs.
Short term medical insurance – Coverage can be issued with a starting and ending date to coordinate with your group coverage. This is the most popular option because coverage costs less than half of the amount of other options. Most people are eligible and policies are issued online at FreedomBenefits.net. Personal help is available to help you find the best policy to fit your situation.
If you have a Health Savings Account (HSA) plan with your former employer, this remains unaffected. You still own the account and the funds can be used as you wish. There is usually no need to take immediate action to preserve your HSA account with the same features and benefits except that future contributions may not be allowed. If you plan to make future contributions, then you will likely want to transfer the HSA to a new custodian outside of the employer-sponsored plan.
In contrast, coverage under a Health Reimbursement Arrangement (HRA) ceases and no “cash-out” benefit is available. Any remaining HRA balances belong to the employer.
Most mid-career individuals who support a family with their earned income admit that they are aware that they do not have enough life insurance. Changing jobs usually means losing group term life insurance. Fortunately most people who attempt to replace it find that are able to easily replace this coverage at the same or lower cost; most commonly in the range of $30 to $40 dollars per month. The easiest way to do this is online. Individual life insurance is not dependent on employment and therefore inherently more stable for personal financial protection. “Smart term life insurance” was recently reintroduced as a term life insurance that does not require a blood test or appointment with an agent. Application is made entirely online and processing is only a few days for most coverage amounts.
The retirement plan
There is one universal rule when it comes to handling your retirement plan – Always roll the account into an IRA before making any withdrawals. This rule applies regardless of whether your retirement plan is a self-directed 410(k) or a company-controlled pension plan. After the rollover is complete, you can then withdraw money from the IRA if you need it. This will lower your overall tax bill, make more cash available to you now and postpone the date that the tax you owe is actually due. The IRS makes many allowances for individuals to withdraw money from an IRA to pay for expenses while unemployed but these provisions are not available if you simply cash in your employer’s retirement account plan.
Despite the overwhelming financial logic supporting a rollover of the retirement plan to a self-directed IRA, almost half of all employees fail to do so. Presumably they are not prepared to make this decision, lack a person they trust to help with the transfer or feel that making no change is a safe option.
Almost all banks and investment companies handle these retirement plan rollovers but you should be careful to find someone you trust to help avoid the hidden internal fees and surrender charges common in retail investment products. Banks and brokerage firms, in particular, tend to use high commissioned mutual funds and annuity products with hefty built in fees. Try to use “no-load” investments because investment fees directly lower your overall rate of return. Larger retirement account balances increase the likelihood that an independent adviser will be able to add net value and make sure that your expenses and taxes are minimized.
To avoid a conflict of interest, simply avoid relying on tax and investment advice provided by the same firm that sells the investments. Independent advisers also offer tax planning that will allow you to minimize the tax bite while still using as much cash as you need to carry you until your next job. It makes sense to use a firm that assigns a financial adviser you can rely on later for tax and other advice. The amount saved will exceed the adviser’s fee for one or two hours of assistance.
Dental insurance is seldom available as a continuation from a prior group plan. Tell your dentist about the changing circumstances and your doctor is likely to propose an attractive treatment option and payment arrangements that does not require insurance. Individual dental insurance and dental discount plans can bridge the gap. See www.freedombenefits.net for a listing of dental plans available where you live.
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My OnlineAdviser andOnlineNavigator service were developed with the intent of offering professional independent advice on a limited basis to working individuals who might not otherwise need an ongoing CPA adviser.
Changing employee benefits is so important to your long term financial success that your extra effort to get another independent professional opinion at this transition point is as important as any other career decision.
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