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. Typically, your benefit depends on your recent earnings. It's also important to note that unemployment income is taxable.
Most states provide a minimum of 26 weeks of unemployment benefits. Additional federal and state benefits have been added during the financial crisis in the form of Emergency Unemployment Compensation (EUC) and Extended Benefits (EB). Contact your state for details.
Step 3: Look into your COBRA rights.
If you work for a company with at least 20 employees, you may be able to continue your group health insurance for up to 18 months after being laid off, thanks to the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986. Many states have mandated an extension of the federal provisionat. For instance, California allows you to continue coverage for an additional 18 months.
You will likely be responsible for paying the entire cost of the plan plus 2 percent, so be sure to do a cost comparison with other plans.
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 Rollover IRA. 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 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.