CFP

Special Circumstances - Job change



As the ability to earn an income is one's greatest financial asset, a job change or unemployment is a major financial milestone requiring careful planning. Such planning can ease the transition.


Job change
Those contemplating a new job should consider a number of issues as they make a decision.
  1. Look beyond the salary - Most job changers focus on the salary they will be paid in the new position, but there are other financial factors that could have a positive or negative impact on personal finances.
    • Commuting costs - A significantly longer commute could offset any salary increase when higher fuel and maintenance costs are considered.
    • Benefits - The benefits packages offered by employers vary greatly. Differences in vacation, health insurance, life insurance, dental plans, dependent care and other benefits can negate salary differences. The tax-free nature of many employer benefits adds significantly to their value.
  2. Retirement impact - A job change can have a significant impact on retirement planning, particularly for those in their 40s or 50s.
    Issues to consider:
    • Type of plans - Defined benefit or defined contribution? Giving up a longtime job that features a traditional, defined benefit pension plan can result in a large financial loss. For a younger worker, a defined contribution plan such as 401(k) or 403(b) can be a better option.
    • Vesting period - How long before a new employee is vested in a retirement plan? Does that period exceed how long one is likely to stay with a job? Is one yet vested under current employer's plan.
    • Employer contribution - What, if anything, does an employer contribute to the retirement savings plan offered to employees? Is there a match? How much is it?
    • Existing retirement savings - Job changers face the question of what to do with savings accumulated in a previous employer's plan. Options include leaving it with the former employer, moving it into a new employer's plan, rolling over the money into an IRA, or cashing out the account.
      Cashing out an existing retirement savings account is the worst option as it will result in a significant loss in the form of penalties and taxes.
    • Health insurance - In addition to studying the cost of health insurance plans offered by a new employer, job changers should know how long before they are eligible to participate in the new employer's plan. Some employers provide coverage immediately; others impose a waiting period of up to three months. A waiting period may require the job changer to purchase COBRA coverage from the previous employer during the transition period.
  3. Job search expenses - Costs associated with searching for a new job may be tax deductible. These costs include transportation to an interview, meals and lodging, telephone calls, printing and photocopying and employment agency fees.

    Job search expenses are categorized as miscellaneous itemized expenses that are deductible only to the extent they exceed 2% of adjusted gross income (AGI). There is no deduction for a new career or a first job.




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