Things to Consider Before Changing Jobs
Before you leave your job, there are important things to consider to ensure that you maintain proper insurance coverage, have sufficient cash on hand, minimize any forfeitures, and avoid unnecessary tax consequences.
Health, Vision, and Dental Insurance Coverage
One of the most essential things to consider before leaving your job is to determine how you and your family will maintain health insurance coverage. According to a 2019 study completed by the American Journal of Public Health, more than half of the bankruptcies in the U.S. were a result of debt issues that were medically-related. When leaving a job, the options for maintaining health coverage include:
- Continuing coverage under your soon-to-be former employer via COBRA
- Switching to your spouse’s health insurance plan
- Purchasing a private policy
- Enrolling in your new employer’s health insurance plan
You qualify for the latter three options because rules governing health insurance create what is known as a special enrollment period. This period begins when you have certain life events, like losing coverage after separating from your employer. Comparing premiums, deductibles, out-of-pocket maximums, and copay/coinsurance rates will help you determine which option is best for you.
Disability & Life Insurance
If you have policies through your employer, you’ll need to determine if you can maintain your coverage after you leave your job. Some policies are portable, meaning that you can keep them even after you separate from service. If you still have a need for this insurance but the policies can’t be maintained after you leave your job, determine if your new employer offers comparable coverages. You may also consider purchasing private policies from an insurance agent. Private policies tend to be more expensive than those offered by employers and you may have to provide proof of insurability by completing a health evaluation before a policy is issued. For those transitioning to self-employment, keep in mind that disability insurance requires proof of income, so until you generate profits, you won’t be able to obtain a disability policy for yourself.
Budget & Emergency Fund
A budget can be handy because it can help you identify all of the expenses that will be impacted when you leave your job. Find the expenses that will be eliminated, the ones that will be added, and the ones that will change. By doing this, you’ll have a better handle on your cash flow. After reviewing how your expenses are likely to change, spend some time evaluating how much cash you have on hand and whether it is enough. Generally speaking, it’s smart to maintain an emergency fund that equals 3 to 6 times your monthly expenses. Adjust your balance based on what you expect your expenses to be moving forward. If you’re starting a business, you may consider increasing your emergency fund balance, so that it covers your expenses for a longer period of time. Self-employment and jobs that pay on a commission basis can have slow periods, so having more cash on hand to weather the lean months will help you navigate the fluctuations.
You have options for your retirement account when you leave your job, but there are also other issues to consider beforehand. Review your vesting status and the loan rules if you borrowed money from your account. If you are close to hitting a vesting milestone, it might be worth delaying your exit until after you reach full vesting status. If you have an outstanding loan, you’ll need to have a plan for repaying it because loans on retirement accounts come due immediately when you leave your job. If not repaid, the unpaid balance is considered a distribution and is subject to taxes and potential penalties if you are under age 59½.
Health Savings & Flexible Spending Accounts
There is a big difference between these accounts when you leave your job. Health Savings Accounts are treated like retirement accounts and are eligible to be maintained at your former employer or rolled over to a private account. Flexible Spending Arrangements on the other hand have “use it or lose it” provisions, meaning that they cannot be rolled over and you forfeit any remaining balance if you leave your employer. If you have money in an FSA, consider spending down the balance before you leave your job.
A change in your income will mean a change in your tax liability. If you’re moving on to a job with a higher salary, prepare to pay higher income taxes. You can specify a new rate for tax withholdings by completing a W-4 when you join your new company, or you can change your family’s withholdings ahead of time by completing a new W-4 for your spouse. The IRS has a handy tax withholding estimator that can help you determine the necessary adjustments you should make.
When starting a new business, you’ll need to be prepared to pay estimated taxes. The IRS requires quarterly payments to be filed by anyone who expects to owe taxes of $1,000 or more when their return is filed. If you expect to generate a profit quickly, you’ll need to set aside money to pay these taxes or you could be subject to penalties later.
There is a lot to consider before leaving a job. Performing a comprehensive review of your financial situation could help you identify ways you can make your career change as seamless as possible. If you are interested in learning more about how a financial plan can benefit you, please contact us today.