Today we’re diving into a topic that’s crucial for anyone who has faced life’s tougher realities; being laid off and that’s the importance of reviewing your tax-advantaged accounts.
Whether you’re navigating severance, unemployment benefits, or a job hunt, your financial health is key to setting yourself up for the next chapter. Let’s explore how to make the most of your tax-advantaged accounts so you can move forward with confidence.
When that big outsourcing firm brought me in to help their clients get through a layoff and set up their lives for financial success, this is one of the most key topics I helped thousands to do better.
First, let’s talk about what tax-advantaged accounts are. These include retirement accounts like 401(k)s, 403(b)s, IRAs, and Health Savings Accounts, or HSAs. What makes these accounts special? They offer tax benefits that can help you save for the future—whether that’s retirement, medical expenses, or other long-term needs.
But when you’re laid off, your approach to these accounts may need to shift. You’ll want to understand how to preserve the benefits, avoid penalties, and ensure these accounts align with your current financial situation and job-seeking goals. Let’s break it down step by step.
If you’ve been contributing to a 401(k) through your employer, being laid off means you may no longer have access to make contributions. However, the money already in your account is still yours.
Here are three key steps you should take:
- Check Your Balance and Vesting Schedule: Review your account balance and find out how much of it is fully vested. Vesting refers to the portion of your employer’s contributions that you own outright. If you’re not fully vested, you might lose some of those contributions. However, your own contributions and their growth are always yours.
- Avoid Cashing Out: It might be tempting to cash out your 401(k) when you’re short on income, but doing so could trigger taxes and early withdrawal penalties if you’re under age 59½. Instead, consider rolling it over into an IRA or your new employer’s plan when you find a job. This preserves the tax-advantaged status of the funds.
- Evaluate a Rollover: A rollover can consolidate your accounts and give you more control over your investments. With an IRA, you’ll typically have more options compared to a 401(k). But be careful to complete a direct rollover to avoid unintended taxes or penalties.
If you had a Health Savings Account, or HSA, through your employer, good news: that account is fully yours. HSAs are portable, meaning you can take them with you even if you’ve left your job. Here’s why it matters:
- Triple Tax Advantage: HSAs are unique because contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. Even if you’re unemployed, you can use your HSA funds for healthcare costs, reducing the strain on your emergency savings.
- Investment Opportunities: If you don’t need to use the funds immediately, you can invest your HSA balance. This is particularly valuable for building long-term savings for healthcare in retirement.
- Watch for Fees: Some HSA accounts have monthly maintenance fees. If your balance isn’t significant, it might be worth transferring the funds to a provider with lower fees or better investment options.
Now that you’ve reviewed your accounts, how does this tie into your job hunt? Financial security gives you the breathing room to focus on finding a role that’s the right fit rather than jumping into the first opportunity out of necessity. Here are a few strategies:
- Budget Wisely: Knowing your cash flow and expenses helps you estimate how long your emergency fund will last. Your tax-advantaged accounts should be a last resort, not a first option, for covering immediate expenses.
- Plan for Benefits in Your Next Job: When evaluating new offers, consider the retirement plans, HSA contributions, and other benefits. A generous employer match or high HSA contributions can significantly boost your financial outlook.
- Stay Focused on Your Goals: Taking time to manage your tax-advantaged accounts reinforces your long-term financial priorities. When you have your financial house in order, you can approach interviews and negotiations with confidence.
To recap, being laid off is a challenging experience, but it’s also an opportunity to take control of your financial future. By reviewing your tax-advantaged accounts, you can preserve your savings, minimize taxes and penalties, and position yourself for success in your next job.
Remember to:
- Check the status of your 401(k) and other retirement accounts.
- Avoid unnecessary withdrawals to keep your money working for you.
- Maximize the benefits of your HSA.
Financial stability empowers you to make thoughtful career decisions rather than rushed ones. And that’s a key ingredient in landing the best job possible.
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