Changing Jobs

Every stage of life has its own financial needs and concerns. The life events on this page can help you target the key financial strategies and issues that are likely to be most important to you in this stage of your life.

Health Insurance Made Simple

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Let’s face it–in today’s world, health insurance is a necessity. In fact, most U.S. citizens and legal residents must have qualifying health insurance or face a penalty tax. Yet the cost of medical care is soaring higher every year, and it’s becoming increasingly difficult (and in some cases, impossible) to pay medical costs out of pocket. Whether you already have health insurance or want to get it, here’s some basic information to help you understand it.

Not part of a group? You may have to go it alone

You may have group health insurance or be able to buy it through your employer. Group insurance is most commonly offered through employers. It is also offered through some civic groups and other organizations (e.g., auto clubs, chambers of commerce). A single policy covers the medical expenses of a group of people. All eligible members of the group can be covered by a group policy regardless of age or physical condition. The premium for group insurance is calculated based on characteristics of the group as a whole, such as average age and degree of occupational hazard. It’s generally less expensive than individual insurance.

If you can’t join a group, consider buying individual insurance. Unlike group insurance, individual insurance is purchased directly from an insurance company or agent. When you apply, you are evaluated in terms of how much risk you present to the insurance company. Your risk potential will determine whether you qualify for insurance and how much it will cost, depending on state laws. You must pay the full premiums yourself.

If you have to go it alone, you can shop for health insurance coverage through state-based Affordable Insurance Marketplaces. You can compare health plans according to price and quality, and ultimately purchase an affordable plan that best meets your health insurance needs.

Know what’s out there

The cost and range of protection that your health insurance provides will depend on your insurance provider and the particular policy you purchase. You may have comprehensive health insurance that involves several types of coverage, or basic coverage that includes hospital, surgical, and physicians’ expenses. In addition, major medical coverage is necessary in the event of a catastrophic accident or illness. Many plans also cover prescriptions, mental health services, and other health-related activities (e.g., health-club memberships).

When it comes to health insurance, HMO, PPO, and POS are more than just letters. You need to know the types of health plans available so that you can make an informed decision. You can obtain health insurance through traditional insurers like Blue Cross/Blue Shield, health maintenance organizations (HMOs), preferred provider organizations (PPOs), point of service (POS) plans, and exclusive provider organizations (EPOs).

  • Traditional insurers: These plans usually allow you flexibility regarding choice of doctors and other health-care providers. Some policies reimburse you for covered expenses, while others make payments directly to medical providers. You will pay a deductible and a percentage of each bill, known as coinsurance.
  • HMOs: Health maintenance organizations cover only medical treatment provided by physicians and facilities within their networks. You must choose a primary care physician, who will either approve or deny any requests to see a specialist. You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription).
  • PPOs: Preferred provider organizations do not require members to seek care from PPO physicians and hospitals, but there is usually strong financial incentive to do so (in terms of percentage of reimbursement). You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription).
  • POSs: Point of service plans combine characteristics of the HMO and PPO. You must choose a primary care physician to be responsible for all of your referrals within the POS network. Although you can choose to go outside the network with this type of plan, your health care will be covered at a lower level.
  • EPOs: Exclusive provider organizations are basically PPOs with one important difference: EPOs provide no coverage for non-network care.

Read your contract

You should have a basic understanding of what your policy does and does not cover. This may help you prevent an unexpected medical bill from arriving in your mailbox, because you’ll know ahead of time, for instance, whether or not liposuction is covered. You must read your policy carefully, particularly the section on limitations and exclusions. The specifics will vary from policy to policy. In general, though, most policies will at least mention the following:

  • Pre-existing conditions: An illness or injury that began or occurred before you obtained coverage under the policy. The Affordable Care Act eliminated the ability of a health insurance policy or plan covering essential health conditions to deny coverage for pre-existing conditions. However, pre-existing conditions may be imposed for other than essential health benefits.
  • Nonduplication of benefits: Benefits will not be paid for amounts reimbursed by other insurance companies.

Your health insurance policy should also address the following issues:

  • Deductible: The amount that you must pay before insurance coverage begins (usually an annual figure
  • Coinsurance: The portion of each medical bill for which you are responsible
  • Co-payment: The fixed fee that you pay for each doctor visit or prescription
  • Family coverage: Many group plans allow you to cover your spouse and dependents for an increased premium
  • Out-of-pocket maximum: This provision is designed to limit your liability for medical expenses in the calendar year; you won’t have to make coinsurance payments in excess of this figure
  • Benefit ceiling: The maximum lifetime payout under the insurance policy, usually at least $1 million

The Fundamentals of Disability Insurance

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Disability insurance pays benefits when you are unable to earn a living because you are sick or injured. Most disability policies pay you a benefit that replaces a percentage of your earned income when you can’t work.

Why would you need disability insurance?

Your chances of being disabled for longer than three months are much greater than your chances of dying prematurely, due in part to medicine that has made many fatal illnesses treatable. (Source: 1985 Commissioner’s Individual Disability Table A–most recent data available.) Although this is good news, it increases your need to protect your income with disability insurance.

Consider what might happen if you suffered an injury or illness and couldn’t work for days, months, or even years. If you’re single, do you have other means of support? If you’re married, you may be able to rely on your spouse for income, but you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could your spouse’s income support your whole family? In addition, remember that you don’t have to be working in a hazardous position to need disability insurance. Accidents happen not only on the job but also at home, and illness can strike anyone.

If you own a business, disability insurance can help protect you in several ways. First, you can purchase an individual policy that will protect your own income. You can also purchase key person insurance designed to protect you from the impact that losing an important employee would have on your business. Finally, you can purchase a disability insurance policy that will enable you to buy your partner’s business interest in the event that he or she becomes disabled.

What do you need to know about disability insurance?

Once you become disabled and apply for benefits, you have to wait for a certain amount of time after the onset of your disability before you receive benefits. If you are applying for benefits under a private insurance policy, this amount of time (known as the elimination period) ranges from 30 to 365 days, although the most common period is 90 days. Group insurance policies through your employer will generally have a waiting period of no more than 8 days for short-term policies that pay benefits for up to six months, and 90 days for long-term policies that pay benefits up to age 65.

You can purchase private disability income insurance policies that offer lifetime coverage, but they are very expensive. Most people buy policies that pay benefits up until age 65; however, two- and five-year benefit periods are also available. Because many injuries or illnesses do not totally disable you, many policies will offer a rider that will pay you a partial benefit if you can work part time and earn some income.

Where can you get disability insurance?

In general, disability insurance can be split into two types: private insurance (individual or group policies purchased from an insurance company), and government insurance (social insurance provided through state or federal governments).

Private disability insurance refers to disability insurance that you purchase through an insurance company. Many types of private disability insurance exist, including individual disability income policies, group policies, group association policies, and riders attached to life insurance policies. Depending on the type of policy chosen, private disability policies usually offer more comprehensive benefits to insured individuals than social insurance. Individually owned disability income policies may offer the most coverage (at a greater cost), followed by group policies offered by an employer or association. Check with your employer or professional association to see if you are eligible to participate in a group plan. If not, contact your insurance broker to look into individual coverage.

Workers’ compensation and Social Security are two well-known government disability insurance programs. In addition, five states (California, Hawaii, New Jersey, New York, and Rhode Island) have mandatory disability insurance programs that provide disability benefits to residents. If you are a civil service worker, a military servicemember, or other federal, state, or local government employee, many disability programs are set up to benefit you. In general, however, government disability insurance programs are designed to provide limited benefits under restrictive terms, and you should not rely on them (as many people mistakenly do) as your main source of income if you are disabled.

Taking Advantage of Employer-Sponsored Retirement Plans

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Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available. If your employer offers such a plan and you’re not participating in it, you should be. Once you’re participating in a plan, try to take full advantage of it.

Understand your employer-sponsored plan

Before you can take advantage of your employer’s plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer’s benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

  • Your employer automatically deducts your contributions from your paycheck. You may never even miss the money — out of sight, out of mind.
  • You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year.
  • With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pretax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
  • Your 401(k), 403(b), or 457(b) plan may let you make after-tax Roth contributions — there’s no up-front tax benefit but qualified distributions are entirely tax free.
  • Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
  • Your funds grow tax deferred in the plan. You don’t pay taxes on investment earnings until you withdraw your money from the plan.
  • You’ll pay income taxes and possibly an early withdrawal penalty if you withdraw your money from the plan.
  • You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.
  • Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit. If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer’s plan instead of somewhere else? One reason is that your pretax contributions to your employer’s plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan — a big advantage if you’re in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you’ll pay income taxes on $90,000 instead of $100,000. (Roth contributions don’t lower your current taxable income but qualified distributions of your contributions and earnings — that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die — are tax free.)

Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren’t taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer’s plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, say you participate in your employer’s tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 6% per year. You’re in the 24% tax bracket and contribute $5,000 to each account at the end of every year. After 40 years, the money placed in a taxable account would be worth $567,680. During the same period, the tax-deferred account would grow to $820,238. Even after taxes have been deducted from the tax-deferred account, the investor would still receive $623,381. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you’re vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer’s match, you’ll be surprised how much faster your balance grows. If you don’t take advantage of your employer’s generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6% of your salary. Each year, you contribute 6% of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer’s plan could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your balance.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

Research the investments available to you. How have they performed over the long term? Have they held their own during down markets? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer’s retirement plan is yours to keep. You have several options at that point, including:

  • Taking a lump-sum distribution. Before choosing this option, consider that you’ll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you’re giving up the continued potential of tax-deferred growth.
  • Leaving your funds in the old plan, growing tax deferred. (Your old plan may not permit this if your balance is less than $5,000, or if you’ve reached the plan’s normal retirement age — typically age 65.) This may be a good idea if you’re happy with the plan’s investments or you need time to decide what to do with your money.
  • Rolling your funds over to an IRA or a new employer’s plan (if the plan accepts rollovers). This may also be an appropriate move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20% for income taxes if you receive the funds before rolling them over, and you’ll need to make up this amount out of pocket when investing in the new plan or IRA). Plus, your funds continue to potentially benefit from tax-deferred growth.

Deciding What to Do with Your 401(k) Plan When You Change Jobs

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When you change jobs, you need to decide what to do with the money in your 401(k) plan. Should you leave it where it is or take it with you? Should you roll the money over into an IRA or into your new employer’s retirement plan?

As you consider your options, keep in mind that one of the greatest advantages of a 401(k) plan is that it allows you to save for retirement on a tax-deferred (or in the case of Roth accounts, potentially tax-free) basis. When changing jobs, it’s essential to consider the continued tax-deferral of these retirement funds, and, if possible, to avoid current taxes and penalties that can eat into the amount of money you’ve saved.

Take the money and run

When you leave your current employer, you can withdraw your 401(k) funds in a lump sum. To do this, simply instruct your 401(k) plan administrator to cut you a check. Then you’re free to do whatever you please with those funds. You can use them to meet expenses (e.g., medical bills, college tuition), put them toward a large purchase (e.g., a home or car), or invest them elsewhere.

While cashing out is certainly tempting, it’s almost never a good idea. Taking a lump sum distribution from your 401(k) can significantly reduce your retirement savings, and is generally not advisable unless you urgently need money and have no other alternatives. Not only will you miss out on the continued tax-deferral of your 401(k) funds, but you’ll also face an immediate tax bite.

First, you’ll have to pay federal (and possibly state) income tax on the money you withdraw (except for the amount of any after-tax contributions you’ve made). If the amount is large enough, you could even be pushed into a higher tax bracket for the year. If you’re under age 59½, you’ll generally have to pay a 10% premature distribution penalty tax in addition to regular income tax, unless you qualify for an exception. (For instance, you’re generally exempt from this penalty if you’re 55 or older when you leave your job.) And, because your employer is also required to withhold 20% of your distribution for federal taxes, the amount of cash you get may be significantly less than you expect.

If your 401(k) plan allows Roth contributions, qualified distributions of your Roth contributions and earnings will be free from federal income tax. If you receive a nonqualified distribution from a Roth 401(k) account, only the earnings (not your original Roth contributions) will be subject to income tax and potential early distribution penalties. (In general, a distribution is qualified if it is paid after you reach age 59½, become disabled, or die, and you have satisfied a five-year holding period.)

Leave the funds where they are

One option when you change jobs is simply to leave the funds in your old employer’s 401(k) plan where they will continue to grow tax deferred.

However, you may not always have this opportunity. If your vested 401(k) balance is $5,000 or less, your employer can require you to take your money out of the plan when you leave the company. (Your vested 401(k) balance consists of anything you’ve contributed to the plan, any employer contributions you have the right to receive, and any investment earnings on these contributions.) Your employer may also require that you withdraw your funds once you reach the plan’s normal retirement age.

Leaving your money in your old employer’s 401(k) plan may be a good idea if you’re happy with the investment alternatives offered or you need time to explore other options. You may also want to leave the funds where they are temporarily if your new employer offers a 401(k) plan but requires new employees to work for the company for a certain length of time before allowing them to participate. When the waiting period is up, you can have the plan administrator of your old employer’s 401(k) transfer your funds to your new employer’s 401(k) (assuming the new plan accepts rollover contributions).

Transfer the funds directly to your new employer’s retirement plan or to an IRA (a direct rollover)

Just as you can always withdraw the funds from your 401(k) when you leave your job, you can always roll over your 401(k) funds to your new employer’s retirement plan if the new plan allows it. You can also roll over your funds to a traditional IRA. You can either transfer the funds to a traditional IRA that you already have, or open a new IRA to receive the funds. There’s no dollar limit on how much 401(k) money you can transfer to an IRA.

You can also roll over (“convert”) your non-Roth 401(k) money to a Roth IRA. The taxable portion of your distribution from the 401(k) plan will be included in your income at the time of the rollover.

If you’ve made Roth contributions to your 401(k) plan, you can only roll those funds over into another Roth 401(k) plan or Roth 403(b) plan (if your new employer’s plan accepts rollovers) or to a Roth IRA.

Generally, the best way to roll over funds is to have your 401(k) plan directly transfer your funds to your new employer’s retirement plan or to an IRA you’ve established. A direct rollover is simply a transfer of assets from the trustee or custodian of one retirement savings plan to the trustee or custodian of another (a “trustee-to-trustee transfer”). It’s a seamless process that allows your retirement savings to remain tax deferred without interruption. Once you fill out the necessary paperwork, your 401(k) funds move directly to your new employer’s retirement plan or to your IRA; the money never passes through your hands. And, if you directly roll over your 401(k) funds following federal rollover rules, no federal income tax will be withheld.

Note: In some cases, your old plan may mail you a check made payable to the trustee or custodian of your employer-sponsored retirement plan or IRA. If that happens, don’t be concerned. This is still considered to be a direct rollover. Bring or mail the check to the institution acting as trustee or custodian of your retirement plan or IRA.

Have the distribution check made out to you, then deposit the funds in your new employer’s retirement plan or in an IRA (an indirect rollover)

You can also roll over funds to an IRA or another employer-sponsored retirement plan (if that plan accepts rollover contributions) by having your 401(k) distribution check made out to you and depositing the funds to your new retirement savings vehicle yourself within 60 days. This is sometimes referred to as an indirect rollover.

However, think twice before choosing this option. Because you effectively have use of this money until you redeposit it, your 401(k) plan is required to withhold 20% for federal income taxes on the taxable portion of your distribution (you get credit for this withholding when you file your federal income tax return for the year). Unless you make up this 20% with out-of-pocket funds when you make your rollover deposit, the amount withheld will be considered a taxable distribution, subject to regular income tax and generally a 10% premature distribution penalty (if you’re under age 59½).

If you do choose to receive the funds through an indirect rollover, don’t put off redepositing the funds. If you don’t make your rollover deposit within 60 days, the entire amount will be considered a taxable distribution.

Which option is appropriate?

Is it better to leave your funds in a 401(k) plan (your current plan or a new employer’s plan), or roll them over into an IRA?

Each retirement savings vehicle has advantages and disadvantages. Here are some points to consider:

  • A traditional IRA can offer almost unlimited investment options; a 401(k) plan limits you to the investment options offered by the plan.
  • A 401(k) may offer a higher level of protection from creditors.
  • A 401(k) may allow you to borrow against the value of your account, depending on plan rules.
  • A 401(k) plan may allow penalty-free withdrawals if you leave your job at age 55 or later. Penalty-free withdrawals are generally not available from IRAs until age 59½.
  • You must take required minimum distributions from traditional IRAs once you reach age 70½. You generally don’t need to take required distributions from 401(k) plans until you retire.
  • Unlike Roth 401(k) accounts, you don’t need to take any lifetime required minimum distributions from Roth IRAs.
  • Employer stock may be eligible for more favorable tax treatment if distributed from a 401(k) plan rather than an IRA.
  • Both IRAs and 401(k) plans may involve investment-related expenses or account fees. In addition, both may provide services such as investment advice, education materials, and retirement planning. Be sure to understand what your plan provides, and what you may be giving up or gaining by transferring your funds.

Finally, no matter which option you choose, you may want to discuss your particular situation with a tax professional (as well as your plan administrator) before deciding what to do with the funds in your 401(k).

Choosing a Beneficiary for Your IRA or 401(k)

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Selecting beneficiaries for retirement benefits is different from choosing beneficiaries for other assets such as life insurance. With retirement benefits, you need to know the impact of income tax and estate tax laws in order to select the right beneficiaries. Although taxes shouldn’t be the sole determining factor in naming your beneficiaries, ignoring the impact of taxes could lead you to make an incorrect choice.

In addition, if you’re married, beneficiary designations may affect the size of minimum required distributions to you from your IRAs and retirement plans while you’re alive.

Paying income tax on most retirement distributions

Most inherited assets such as bank accounts, stocks, and real estate pass to your beneficiaries without income tax being due. However, that’s not usually the case with 401(k) plans and IRAs.

Beneficiaries pay ordinary income tax on distributions from pretax 401(k) accounts and traditional IRAs. With Roth IRAs and Roth 401(k) accounts, however, your beneficiaries can receive the benefits free from income tax if all of the tax requirements are met. That means you need to consider the impact of income taxes when designating beneficiaries for your 401(k) and IRA assets.

For example, if one of your children inherits $100,000 cash from you and another child receives your pretax 401(k) account worth $100,000, they aren’t receiving the same amount. The reason is that all distributions from the 401(k) plan will be subject to income tax at ordinary income tax rates, while the cash isn’t subject to income tax when it passes to your child upon your death.

Similarly, if one of your children inherits your taxable traditional IRA and another child receives your income-tax-free Roth IRA, the bottom line is different for each of them.

Naming or changing beneficiaries

When you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries. Changes are made in the same way–you complete a new beneficiary designation form. A will or trust does not override your beneficiary designation form. However, spouses may have special rights under federal or state law.

It’s a good idea to review your beneficiary designation form at least every two to three years. Also, be sure to update your form to reflect changes in financial circumstances. Beneficiary designations are important estate planning documents. Seek legal advice as needed.

Designating primary and secondary beneficiaries

When it comes to beneficiary designation forms, you want to avoid gaps. If you don’t have a named beneficiary who survives you, your estate may end up as the beneficiary, which is not always the best result.

Your primary beneficiary is your first choice to receive retirement benefits. You can name more than one person or entity as your primary beneficiary. If your primary beneficiary doesn’t survive you or decides to decline the benefits (the tax term for this is a disclaimer), then your secondary (or “contingent”) beneficiaries receive the benefits.

Having multiple beneficiaries

You can name more than one beneficiary to share in the proceeds. You just need to specify the percentage each beneficiary will receive (the shares do not have to be equal). You should also state who will receive the proceeds should a beneficiary not survive you.

In some cases, you’ll want to designate a different beneficiary for each account or have one account divided into subaccounts (with a beneficiary for each subaccount). You’d do this to allow each beneficiary to use his or her own life expectancy in calculating required distributions after your death. This, in turn, can permit greater tax deferral (delay) and flexibility for your beneficiaries in paying income tax on distributions.

Avoiding gaps or naming your estate as a beneficiary

There are two ways your retirement benefits could end up in your probate estate. Probate is the court process by which assets are transferred from someone who has died to the heirs or beneficiaries entitled to those assets.

First, you might name your estate as the beneficiary. Second, if no named beneficiary survives you, your probate estate may end up as the beneficiary by default. If your probate estate is your beneficiary, several problems can arise.

If your estate receives your retirement benefits, the opportunity to maximize tax deferral by spreading out distributions may be lost. In addition, probate can mean paying attorney’s and executor’s fees and delaying the distribution of benefits.

Naming your spouse as a beneficiary

When it comes to taxes, your spouse is usually the best choice for a primary beneficiary.

A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling over your 401(k) or IRA to his or her IRA or plan, a surviving spouse can generally decide to treat your IRA as his or her own IRA. These options can provide more tax and planning options.

If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxable distributions to you from retirement assets while you’re alive. This can allow more assets to stay in the retirement account longer and delay the payment of income tax on distributions.

Although naming a surviving spouse can produce the best income tax result, that isn’t necessarily the case with death taxes. At your death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased (note: special tax rules and requirements apply for a surviving spouse who is not a U.S. citizen). If your spouse’s taxable estate for federal tax purposes at his or her death exceeds the applicable exclusion amount, then federal death tax may be due. In other words, one possible downside to naming your spouse as the primary beneficiary is that it may increase the size of your spouse’s estate for death tax purposes, which in turn may result in death tax or increased death tax when your spouse dies.

Naming other individuals as beneficiaries

You may have some limits on choosing beneficiaries other than your spouse. No matter where you live, federal law dictates that your surviving spouse be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective written waiver. And if you live in one of the community property states, your spouse may have rights related to your IRA regardless of whether he or she is named as the primary beneficiary.

Keep in mind that a nonspouse beneficiary cannot roll over your 401(k) or IRA to his or her own IRA. However, a nonspouse beneficiary can directly roll over all or part of your 401(k) benefits to an inherited IRA.

Naming a trust as a beneficiary

You must follow special tax rules when naming a trust as a beneficiary, and there may be income tax complications. Seek legal advice before designating a trust as a beneficiary.

Naming a charity as a beneficiary

In general, naming a charity as the primary beneficiary will not affect required distributions to you during your lifetime. However, after your death, having a charity named with other beneficiaries on the same asset could affect the tax-deferral possibilities of the noncharitable beneficiaries, depending on how soon after your death the charity receives its share of the benefits.

Understanding Defined Benefit PlansUnderstanding_Defined_Ben_Plan_Certified Wealth Management & Investment

You may be counting on funds from a defined benefit plan to help you achieve a comfortable retirement. Often referred to as traditional pension plans, defined benefit plans promise to pay you a specified amount at retirement.

To help you understand the role a defined benefit plan might play in your retirement savings strategy, here’s a look at some basic plan attributes. But since every employer’s plan is a little different, you’ll need to read the summary plan description, or SPD, provided by your company to find out the details of your own plan.

What are defined benefit plans?Defined benefit plans are qualified employer-sponsored retirement plans. Like other qualified plans, they offer tax incentives both to employers and to participating employees. For example, your employer can generally deduct contributions made to the plan. And you generally won’t owe tax on those contributions until you begin receiving distributions from the plan (usually during retirement). However, these tax incentives come with strings attached–all qualified plans, including defined benefit plans, must comply with a complex set of rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.

How do defined benefit plans work?A defined benefit plan guarantees you a certain benefit when you retire. How much you receive generally depends on factors such as your salary, age, and years of service with the company.

Each year, pension actuaries calculate the future benefits that are projected to be paid from the plan, and ultimately determine what amount, if any, needs to be contributed to the plan to fund that projected benefit payout. Employers are normally the only contributors to the plan. But defined benefit plans can require that employees contribute to the plan, although it’s uncommon.

You may have to work for a specific number of years before you have a permanent right to any retirement benefit under a plan. This is generally referred to as “vesting.” If you leave your job before you fully vest in an employer’s defined benefit plan, you won’t get full retirement benefits from the plan.

How are retirement benefits calculated?Retirement benefits under a defined benefit plan are based on a formula. This formula can provide for a set dollar amount for each year you work for the employer, or it can provide for a specified percentage of earnings. Many plans calculate an employee’s retirement benefit by averaging the employee’s earnings during the last few years of employment (or, alternatively, averaging an employee’s earnings for his or her entire career), taking a specified percentage of the average, and then multiplying it by the employee’s number of years of service.

Note: Many defined benefit pension plan formulas also reduce pension benefits by a percentage of the amount of Social Security benefits you can expect to receive.

How will retirement benefits be paid?Many defined benefit plans allow you to choose how you want your benefits to be paid. Payment options commonly offered include:

  • A single life annuity: You receive a fixed monthly benefit until you die; after you die, no further payments are made to your survivors.
  • A qualified joint and survivor annuity: You receive a fixed monthly benefit until you die; after you die, your surviving spouse will continue to receive benefits (in an amount equal to at least 50 percent of your benefit) until his or her death.
  • A lump-sum payment: You receive the entire value of your plan in a lump sum; no further payments will be made to you or your survivors.

Choosing the right payment option is important, because the option you choose can affect the amount of benefit you ultimately receive. You’ll want to consider all of your options carefully, and compare the benefit payment amounts under each option. Because so much may hinge on this decision, you may want to discuss your options with a financial advisor.

What are some advantages offered by defined benefit plans?

  • Defined benefit plans can be a major source of retirement income. They’re generally designed to replace a certain percentage (e.g., 70 percent) of your preretirement income when combined with Social Security.
  • Benefits do not hinge on the performance of underlying investments, so you know ahead of time how much you can expect to receive at retirement.
  • Most benefits are insured up to a certain annual maximum by the federal government through the Pension Benefit Guaranty Corporation (PBGC).

How do defined benefit plans differ from defined contribution plans?Though it’s easy to do, don’t confuse a defined benefit plan with another type of qualified retirement plan, the defined contribution plan (e.g., 401(k) plan, profit-sharing plan). As the name implies, a defined benefit plan focuses on the ultimate benefits paid out. Your employer promises to pay you a certain amount at retirement and is responsible for making sure that there are enough funds in the plan to eventually pay out this amount, even if plan investments don’t perform well.

In contrast, defined contribution plans focus primarily on current contributions made to the plan. Your plan specifies the contribution amount you’re entitled to each year (contributions made by either you or your employer), but your employer is not obligated to pay you a specified amount at retirement. Instead, the amount you receive at retirement will depend on the investments you choose and how those investments perform.

Some employers offer hybrid plans. Hybrid plans include defined benefit plans that have many of the characteristics of defined contribution plans. One of the most popular forms of a hybrid plan is the cash balance plan.

What are cash balance plans?Cash balance plans are defined benefit plans that in many ways resemble defined contribution plans. Like defined benefit plans, they are obligated to pay you a specified amount at retirement, and are insured by the federal government. But they also offer one of the most familiar features of a defined contribution plan: Retirement funds accumulate in an individual account (in this case, a hypothetical account).

This allows you to easily track how much retirement benefit you have accrued. And your benefit is portable. If you leave your employer, you can generally opt to receive a lump-sum distribution of your vested account balance. These funds can be rolled over to an individual retirement account (IRA) or to your new employer’s retirement plan.

What you should do nowIt’s never too early to start planning for retirement. Your pension income, along with Social Security, personal savings, and investment income, can help you realize your dream of living well in retirement.

Start by finding out how much you can expect to receive from your defined benefit plan when you retire. Your employer will send you this information every year. But read the fine print. Estimates often assume that you’ll retire at age 65 with a single life annuity. Your monthly benefit could end up to be far less if you retire early or receive a joint and survivor annuity. Finally, remember that most defined benefit plans don’t offer cost-of-living adjustments, so benefits that seem generous now may be worth a lot less in the future when inflation takes its toll.

Here are some other things you can do to make the most of your defined benefit plan:

  • Read the summary plan description. It provides details about your company’s pension plan and includes important information, such as vesting requirements and payment options. Address questions to your plan administrator if there’s anything you don’t understand.
  • Review your account information, making sure you know what benefits you are entitled to. Do this periodically, checking your Social Security number, date of birth, and the compensation used to calculate your benefits, since these are common sources of error.
  • Notify your plan administrator of any life changes that may affect your benefits (e.g., marriage, divorce, death of spouse).
  • Keep track of the pension information for each company you’ve worked for. Make sure you have copies of pension plan statements that accurately reflect the amount of benefits you’re entitled to receive.
  • Watch out for changes. Employers are allowed to change and even terminate pension plans, but you will receive ample notice. The key is, read all notices you receive.
  • Assess the impact of changing jobs on your pension. Consider staying with one employer at least until you’re vested. Keep in mind that the longer you stay with one employer, the more you’re likely to receive at retirement.

Evaluating a Job Offer

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If you’re considering changing jobs, you’re not alone. Today, few people stay with one employer until retirement. It’s likely that at some point during your career, you’ll be looking for a new job. You may be looking to make more money or seeking greater career opportunities. Or, you may be forced to look for new employment if your company restructures. Whatever the reason, you’ll eventually be faced with an important decision: When you receive an offer, should you take it? You can find the job that’s right for you by following a few sensible steps.

How does the salary offer stack up?

What if the salary you’ve been offered is less than you expected? First, find out how frequently you can expect performance reviews and/or pay increases. Expect the company to increase your salary at least annually. To fully evaluate the salary being offered, compare it with the average pay of other professionals working in the same field. You can do this by talking to others who hold similar jobs, calling a recruiter (i.e., a headhunter), or doing research at your local library or on the Internet. The Bureau of Labor Statistics is a good source for this information.

Bonuses and other benefits

Next, ask about bonuses, commissions, and profit-sharing plans that can increase your total income. Find out what benefits the company offers and how much of the cost you’ll bear as an employee. Don’t overlook the value of good employee benefits. They can add the equivalent of thousands of dollars to your base pay. Ask to look over the benefits package available to new employees. Also, find out what opportunities exist for you to move up in the company. This includes determining what the company’s goals are and the type of employee that the company values.

Personal and professional consequences

Will you be better off financially if you take the job? Will you work a lot of overtime, and is the scheduling somewhat flexible? Must you travel extensively? Consider the related costs of taking the job, including the cost of transportation, new clothes, a cell phone, increased day-care expenses, and the cost of your spouse leaving his or her job if you are required to relocate. Also, take a look at the company’s work environment. You may be getting a good salary and great benefits, but you may still be unhappy if the work environment doesn’t suit you. Try to meet the individuals you will be closely working with. It may also be helpful to find out something about the company’s key executives and to read a copy of the mission statement.

Deciding whether to accept the job offer

You’ve spent a lot of time and energy researching and evaluating a potential job, but the hardest part is yet to come: Now that you have received a job offer, you must decide whether to accept it. Review the information you’ve gathered. Think back to the interview, paying close attention to your feelings and intuition about the company, the position, and the people you came in contact with. Consider not only the salary and benefits you’ve been offered, but also the future opportunities you might expect with the company. How strong is the company financially, and is it part of a growing industry? Decide if you would be happy and excited working there. If you’re having trouble making a decision, make a list of the pros and cons. It may soon become clear whether the positives outweigh the negatives, or vice versa.

Negotiating a better offer

Sometimes you really want the job you’ve been offered, but you find the salary, benefits, or hours unfavorable. In this case, it’s time to negotiate. You may be reluctant to negotiate because you fear that the company will rescind the offer or respond negatively. However, if you truly want the job but find the offer unacceptable, you may as well negotiate for a better offer rather than walk away from a great opportunity without trying. The first step in negotiating is to tell your potential employer specifically what it is that you want. State the amount of money you want or the exact hours you wish to work. Make it clear that if the company accepts your terms, you are willing and able to accept its offer immediately.

What happens next? It’s possible that the company will accept your counteroffer. Or, the company may reject it, because either company policy does not allow negotiation or the company is unwilling to move from its original offer. The company may make you a second offer, typically a compromise between its first offer and your counteroffer. In either case, the ball is back in your court. If you still can’t decide whether to take the job, ask for a day or two to think about it. Take your time. Accepting a new job is a big step.

Am I Having Enough Withheld?

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If you fail to estimate your federal income tax withholding properly, it may cost you in a variety of ways. If you receive an income tax refund, it essentially means that you provided the IRS with an interest-free loan during the year. By comparison, if you owe taxes when you file your return, you may have to scramble for cash at tax time — and possibly owe interest and penalties to the IRS as well.

When determining the correct withholding amount for your salary or wages, your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due. (You may owe some money at the time you file your return, but it shouldn’t be much.) You can accomplish this by reading and understanding IRS Publication 505, properly completing Form W-4 (and accompanying worksheets), and providing an updated Form W-4 to your employer when your circumstances change significantly.

Form W-4 helps you determine the proper withholding amount

Two factors determine the amount of income tax that your employer withholds from your regular pay: the amount you earn and the information you provide on Form W-4. This form asks you for three pieces of information:

  • The number of withholding allowances you want to claim: You can claim up to the maximum number you’re entitled to, claim less than you’re entitled to, or claim zero.
  • Whether you want taxes to be withheld at the single, married, or married with tax withheld at single rate: The married status, which is associated with a lower withholding rate, should generally be selected only by those taxpayers who are married and file a joint return. Those who are married and file separately should select married with tax withheld at single rate.
  • The additional amount (if any) you want withheld from your paycheck: This is optional; you can specify any additional amount of money you want withheld.

When both spouses work and have taxes withheld at the married rate, they sometimes end up with insufficient taxes withheld. If this happens to you, remember that you can always choose to withhold at the single rate. In addition, you can determine the proper withholding amount by completing Form W-4’s two-earner/two-job worksheet.

Complete the worksheets to claim the correct number of allowances

To understand Form W-4, you must understand allowances. Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less taxes are taken from your paycheck (and the more cash ends up in your pocket on payday). For example, you can maximize the amount withheld from your paycheck to ensure that you have enough tax withheld to cover your tax liability by claiming zero allowances. This will reduce the amount of cash you take home in your paycheck. The following factors determine your number of allowances:

  • The number of jobs that you work
  • The deductions, adjustments to income, and credits that you expect to take during the year
  • Your filing status
  • Whether your spouse works

To claim the correct number of allowances, you should complete Form W-4’s worksheets. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet. IRS Publication 505 (Tax Withholding and Estimated Tax) explains these worksheets.

Check your withholding

To avoid surprises at tax time, it’s a good idea to periodically check your withholding. If you accurately complete all Form W-4 worksheets and don’t have significant nonwage income (e.g., interest and dividends), it’s likely that your employer will withhold an amount close to the tax you’ll owe on your return. But in the following cases, accurate completion of the Form W-4 worksheets alone won’t guarantee that you’ll have the correct amount of tax withheld:

  • When you’re married and both spouses work, or if either of you start or stop working
  • When you or your spouse are working more than one job
  • When you have significant nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income, or the amount of your nonwage income changes
  • When you’ll owe other taxes on your return, such as self-employment tax or household employment tax
  • When you have a lifestyle change (e.g., marriage, divorce, birth or adoption of a child, new home, retirement) that affects the tax deductions or credits you may claim
  • When there are tax law changes that affect the amount of tax you’ll owe

In these cases, IRS Publication 505 can help you compare the total tax that you’ll withhold for the year with the tax that you expect to owe on your return. It can also help you determine any additional amount you may need to withhold from each paycheck to avoid owing taxes when you file your return. Alternatively, it may help you identify if you’re having too much tax withheld. If you find that you need to make changes to your withholding, you can do so at any time simply by submitting a new Form W-4 to your employer.

Understanding Managed Care

If it’s been a while since you’ve shopped around for health insurance, you may find that things have changed since the last time you tackled this chore. Not long ago, you could go to any doctor or hospital, and you and your insurance company would each pay part of the bill. Now, most health insurance policies are some form of managed care, with controls to contain costs.

Today, more than half of insured Americans are covered by a managed care plan–a plan that gives financial incentives to encourage you to use doctors who are part of the plan network. The better you understand managed care, the better you will be able to select the plan that best meets your needs and budget.

How do managed care plans work?

Insurance companies negotiate discounts with medical providers who sign up to be part of the managed care plan’s network. In exchange, the providers get an instant pool of patients. The plans generally limit your out-of-pocket expenses for covered care. They usually require (or encourage) that you seek care from a specific list of contracting doctors, hospitals, and other providers. If you go out of the plan’s network for medical treatment, you have to pay higher out-of-pocket expenses.

The goal of managed care is to provide health care that is:

  • Cost effective
  • In the best setting
  • Of the highest quality
  • Medically necessary
  • Offered by the most appropriate provider

To increase the overall quality of care and reduce costs, many managed care plans require that you see a primary care doctor (family practitioner, internist, or pediatrician) before visiting a specialist. Your primary care doctor has the responsibility of knowing your complete medical history, making the initial diagnosis, and advising on further treatment.

Health maintenance organizations

  • Your primary care doctor is the gatekeeper who coordinates your health care and refers you to specialists
  • You must use specific health-care providers and facilities to be fully covered
  • You can go outside the network only if prior approval is given or for an emergency
  • Nonemergency and elective admissions to the hospital require prior approval
  • You can go for emergency care wherever and whenever you determine you need it, without prior approval
  • Some treatments and procedures require a second opinion
  • Preventive care programs are available to keep you well
  • Doctors are paid based on a capped or fixed-fee arrangement rather than payment for services given
  • You do not have to file claim forms with the insurance company
  • Screening tests for cancer and other chronic diseases are usually covered

Health maintenance organizations (HMOs) are considered the most restrictive because they offer you the least amount of choices. However, they tend to have both the lowest out-of-pocket costs and the least paperwork, and they promote general wellness programs to keep you healthy.

Preferred provider organizations

  • Most preferred provider organizations (PPOs) do not require a referral from your primary care doctor to visit a specialist
  • You will have higher out-of-pocket costs if you use providers outside the network
  • Prior approval is required for hospitalization (except for an emergency) and some outpatient services
  • Some treatments and procedures require a second opinion
  • Emergency care doesn’t require approval if you determine you need it
  • Preventive care is not always covered
  • Your doctors and hospitals are paid for services provided
  • Your medical provider files the claim forms

PPOs are less restrictive than HMOs in your choice of health-care provider, but your out-of-pocket costs may be higher. The coverage provided for treatment and care is similar to an HMO.

Point of service plans

  • There are financial incentives, such as lower out-of-pocket costs, to use network providers
  • You can receive care from providers outside the network without prior approval
  • If you go outside the network, you’ll be responsible for filing insurance claims
  • If your doctor refers you out of the network, the plan pays all or most of the bill
  • Premiums are higher than those for HMOs or PPOs

Point of service (POS) plans are less restrictive than HMOs. They combine some features of HMOs and PPOs and have the highest out-of-pocket costs. So even though POS plans allow greater choice at the time the service is delivered, you’ll pay more for your health care.

How do I select the plan that’s right for me?

There is no perfect plan–you’ll have to do some give-and-take. Some questions to consider:

  • Do your current doctors participate in any plans?
  • Does it matter that you might be limited to your choice of doctors and hospitals?
  • What level of services do you really need?
  • Would getting referrals to specialists be a problem?
  • How much can you afford to spend?
  • Are you willing to file insurance claim forms?
  • What is the plan’s rating on quality of care and member satisfaction?

What to ask before you buy

After you decide what benefits are important, you will be in a better position to compare individual plans. Plans differ with regard to out-of-pocket costs, services provided, and how easy it is to get those services. Although no plan will pay for everything, some plans cover more than others.

  • Ask to see a network directory. Are your current doctors in it?
  • Are you willing to change doctors if necessary?
  • Are the doctors close to you accepting new patients?
  • Does the plan use a local hospital?
  • Who decides if you can go to the hospital?
  • What is the plan’s policy on pre-existing conditions?
  • Is there a maximum lifetime benefit?
  • Are preventive care services offered?
  • What is the prescription drug policy?
  • Are there limits on medical tests?
  • What are the mental health benefits?
  • Does the plan pay for any special services you need?
  • How easily can you change primary care doctors?
  • Are therapies such as acupuncture or chiropractic services covered?
  • How easily can you get help over the telephone?

Whatever plan you choose, you will become a partner with your doctor and insurance company. Keep in mind that managed care plans make more money when they keep you healthy and out of hospitals, reduce the amount of care you receive, and stay within the budget set for each member’s total medical care. It will be your responsibility to schedule physical exams and take advantage of other preventive care programs. Make sure there is a good match between what you think you need and what is provided.

Comparing Health Insurance Plans

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Perhaps you’re starting a new job or trying to integrate employee benefits with your new spouse. Or maybe you’re shopping for individual health insurance coverage. One of the challenges when comparing health plans is that many different types of plans are available, including indemnity plans, health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point of service (POS) plans. If you are offered the chance to choose among different types of plans, you’ll first have to decide which type best suits your needs. Then, you can begin comparing and evaluating policies.

Compare premiumsThe premium may be the first thing you look at when trying to choose a health plan. Individual coverage can be expensive because the insurer takes on more risk by covering just one person. However, if an individual policy is your only option, you should compare the premiums charged by several different insurers. Even though companies all use certain information to price a policy (e.g., your age and health), premiums may still vary widely among companies. You can eliminate policies that cost more than you can afford. Also, try to get some idea of how much premiums will increase as you age and as the cost of medical care rises.

You should also look at cost when you’re comparing group health plans. Even if two plans provide similar coverage, the group premiums may differ. That’s because the premium in each case is based on facts about that particular group (e.g., average age). In addition, keep in mind that the employer or other group often pays all or part of the group premium. The less premium you have to pay, the more attractive the plan. Finally, find out how much it will cost to cover your family members under the plan.

Compare deductibles, co-payments, and coinsuranceThese costs often vary widely among health plans, and some plans may not impose them at all. This is something to look at closely when comparing plans, because these additional costs can greatly affect your total out-of-pocket cost. The deductible is the amount that you have to pay toward your medical expenses before your insurance company begins to cover you. The co-payment is the amount that you have to pay each time you visit a health-care provider or need a prescription. Finally, coinsurance is the percentage of your medical costs that you have to pay after you satisfy any deductible that applies (not including any co-payments you’re required to make). Consider the following questions:

  • Will you have to satisfy an individual deductible, a family deductible, or both? What are the amounts?
  • Do you have to satisfy the deductible annually, or every time you are hospitalized?
  • Do different deductibles apply to different types of care? For example, you may have to pay a $500-per-year deductible for hospitalization, but only a $100-per-year deductible for doctors’ visits.
  • How much is the co-payment when you see your doctor for routine care? When you see a specialist? When you are admitted to the hospital? When you pick up a prescription?
  • What percentage of your medical costs will you have to pay after you satisfy your deductible? A common coinsurance rate is 20 percent.
  • What is your out-of-pocket maximum? To limit your liability, you may no longer have to make coinsurance payments once your medical expenses for the year reach a certain level (e.g., your insurer pays 100 percent of your annual expenses over $10,000).
  • Do you have the flexibility to change the amount of your deductibles and/or co-payments? Choosing higher amounts may help you lower your premium.

Compare coverage and featuresIt’s equally important to assess each plan’s coverage and specific features. Here are some issues to think about:

  • What coverage exclusions apply? Specific types of illnesses, injuries, treatments, and procedures may not be covered at all under the plan. The plan should clearly state what these are. However, beginning in 2010, the Patient Protection and Affordable Care Act of 2010 (PPACA) prohibits health plans from denying children coverage based on preexisting conditions or from including pre-existing condition exclusions for children. Beginning in 2014, all health insurers must sell coverage to everyone who applies, regardless of their medical history or health status, nor will plans be able to exclude coverage for those medical conditions.
  • What coverage limitations are you subject to? For example, some plans impose a waiting period before you can be covered for pre-existing conditions. Like exclusions, limitations should be spelled out in the plan.
  • Does the plan fully or only partially cover the following expenses: surgery, hospitalization, routine medical exams, diagnostic procedures, visits to a specialist, maternity care, immunizations, rehabilitation, and home health care? You’ll find that the level of coverage often varies in each of these areas.
  • Does the plan impose a maximum benefit ceiling, and if so, what is it? PPACA prohibits individual and group plans from placing lifetime dollar limits on available coverage.
  • How much freedom do you have in choosing your own doctors and health-care providers? For example, can you go outside your plan’s network? Do you need referrals to see specialists?
  • Does the plan require you to get approval from the insurance company for coverage of certain types of care? For example, if you’re terminally ill, certain types of experimental treatment may need to be approved by your insurer.
  • Does the plan offer any extras as part of the standard coverage? Some items that may be of interest to you are vision care, dental care, prescription drug coverage, and mental health coverage.
  • Does the plan offer family coverage, as many employer-sponsored plans do? This can be very important if you have a spouse and/or children in need of health coverage.
  • What optional riders and endorsements are available? Adding these features can allow you to tailor a plan to your individual needs.

For the best results when comparing plans, you should balance coverage and features against cost. This will allow you to determine which plan gives you the best overall value for your money.

Compare insurance companiesIt’s also a good idea to compare the insurance companies behind the plans–your satisfaction with a company may mean a lot over the long run. Here are some questions that may help you weed out insurers:

  • Does the insurer provide good customer service? You want to speak to a knowledgeable, polite customer service representative when you call your insurance company. Unfortunately, busy insurance companies may keep you on hold for a long time before you get through to a representative. Look for a company that has a toll-free number and longer-than-average customer service hours.
  • How does the insurer pay claims? Will the provider bill the insurance company directly, or will you be expected to pay the provider and then file a claim with your insurer? It may not matter much in terms of cost, but it’s a lot more complicated if you have to fill out forms or pay upfront every time you seek health care. Also, check with your doctor to find out which insurers generally pay claims on time.
  • Is the insurer financially stable? Make sure that the insurer you choose is financially sound and will be able to pay its claims. You can get information on the financial stability of most insurers from your state’s insurance department or from a firm that rates insurance companies (e.g., A. M. Best, Moody’s).
  • If you’re comparing group plans, are your coworkers satisfied with the plan they’ve chosen? Do they have trouble getting their claims paid?

If I work at home occasionally, am I entitled to a home office deduction? 


To qualify for an income tax deduction for home office expenses, the IRS requires that you meet two tests–the place of business test and the exclusive and regular use test.

To pass the place of business test, you must show that you use a portion of your home as:

  • The principal place for any trade or business you conduct, including administrative use. The IRS uses a two-part test to determine if a home office is a taxpayer’s principal place of business. The test takes into account the relative importance of business activities performed at each business location and the amount of time spent conducting those activities at each place of business.
  • A place where you meet clients or customers in the normal course of business.
  • In the case of a separate structure that is not attached to your dwelling unit, you must show that you use it in connection with your trade or business (i.e., it needn’t be your principal place of business).

The exclusive and regular use test requires that you use that portion of your home both exclusively for business and on a regular basis.

Depending on the nature of your work, your occasional home use is unlikely to qualify for a home office deduction since it is doubtful you would meet the first test (because occasional implies it isn’t your principal place of business). You are also unlikely to satisfy the second test (because occasional implies that the use of your home isn’t exclusive or regular).

Because the rules are complicated, it might be wise to review IRS Publication 587, titled Business Use of Your Home, or consult a tax professional.

If I leave my company, can I take my life insurance policy with me? 


If you leave your company, you can often continue your life insurance coverage with the same insurance company. The group life insurance contract under which you are insured may have a conversion privilege available to all employees who are insured under the employer’s group plan. A conversion privilege will be subject to certain conditions described in the master contract. Typically, these conversion rates are more expensive than an individual policy you could buy on your own if you are healthy.

You generally have 31 days from the day you leave your employer to submit an application. In most cases, you can apply for any kind of individual life insurance that the company offers. The insurance company generally will not include any supplemental coverages, such as disability insurance, that may have been included with your group life coverage.

If you decide to convert to a permanent life insurance policy, the premium will be based on your current age and the same amount of insurance that your group policy provides. The premiums must be based on standard or regular rates. No medical exam is generally required. This is especially important if you are not in good health when you leave employment.

Even if you don’t take advantage of a conversion privilege when you leave your company, your group life coverage generally continues for 31 days after your last day of work.

Check with your human resources manager or financial advisor.

If I leave my job, will I lose my employer-sponsored health insurance? 


If you leave your job, voluntarily or otherwise, you may be able to continue your employer-sponsored health insurance under the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. Eligibility does come with some restrictions, however.

Employers with 20 or more employees are required to offer continued health insurance for up to 18 months to employees who leave the company. The employer must make this offer in writing within 14 days of an employee’s last working day. To qualify, you, the employee, must have been covered by the employer’s health plan on the day before your employment status changed. There may also be state laws that affect your options. You should be aware that you are responsible for paying the premiums for COBRA, and the coverage is usually expensive. Your employer may also charge a fee, up to 2 percent of the monthly premium, for administrative costs.

If COBRA is not applicable in your case, other options are available. For example, you may be able to convert your employer-sponsored health plan to an individual health plan. Although you may not have to pass a medical exam, a pre-existing condition could be excluded.

Another option is to purchase a short-term health policy that covers your health costs on a temporary basis, usually two to six months. Short-term policies are generally not expensive, but you will not be covered for any pre-existing conditions. Insurance companies provide this coverage at reduced administrative costs and then pass the savings on to their customers.

A fourth option is to continue your health coverage through a professional association that offers health insurance to its members at reduced rates. This is a particularly good option if you are self-employed.

You also may shop for and purchase an individual health insurance policy through either a state-based or federal health insurance Exchange Marketplace. In any case, it’s important to remember that as of 2014, the Patient Protection and Affordable Care Act requires that everyone has health insurance unless an exception applies.

If I have long-term disability insurance coverage through my employer, do I need my own policy, too? 


First, how much disability insurance do you have through your employer, and what other financial resources do you have? Other resources might include your savings, property or assets you could sell, borrowed money, or your spouse’s income. Now ask yourself if the combination of your employer-sponsored disability insurance and your other resources will be enough to pay your bills if you suddenly become disabled.

Unless you’re independently wealthy, chances are good that your personal financial resources won’t carry you through a long-term disability. Also, the money you’ve saved is probably earmarked for goals other than disability–your retirement or your children’s education, for example. You might have to deplete these accounts to pay your bills.

Some employers do not offer long-term disability insurance. If your employer does, look closely at the policy. Review the monthly benefit and the length of the waiting and benefit periods. Is the monthly payment enough to pay your bills? The typical group policy covers 60 percent of your income, up to a maximum amount. Is income defined as your base salary, or does it include commissions and overtime?

How long is the waiting period in your employer’s disability policy? This is the length of time before any benefits are paid to you. Often, an employer’s disability policy coordinates with the company’s sick pay policy. You may have to use up all of your paid sick days before the disability policy begins to pay benefits. You need to plan on having cash available to cover any gaps in coverage.

If you decide to supplement your employer-sponsored policy with one of your own, make sure the two policies coordinate in ways that work for you. For example, if you need to increase the monthly benefit, be sure your own policy will pay concurrently with your employer-sponsored policy.

Should I contribute to my 401(k) plan at work? 


Yes. Unless you absolutely cannot afford to set aside any dollars whatsoever, you should contribute to your employer’s 401(k) plan. A 401(k) plan is one of the most powerful tools you can use to save for your retirement.

The first benefit is that your pre-tax contributions to a 401(k) plan are not taxed as current income. They come right off the top of your salary before taxes are withheld. This reduces your taxable income, allowing you to pay less in taxes each year. You’ll eventually pay taxes on amounts contributed when you withdraw money from the plan, but you may be in a lower tax bracket by then. You may even qualify for a partial tax credit for amounts contributed.

Furthermore, money held in a 401(k) plan grows tax deferred. The investment earnings on plan assets are not taxed as long as they remain inside the plan. Only when you withdraw those earnings will you pay taxes on them (again, possibly at a lower rate). In the meantime, tax-deferred growth gives you the opportunity to build a substantial 401(k) balance over the long term, depending on investment performance.

If you’re lucky, your employer will match your contributions up to a certain level (e.g., 50 cents on the dollar up to 6% of your salary). You typically become vested in your employer’s contributions and related earnings through years of service (the details depend on the plan). Employer contributions are also pre-tax and are basically free money (once you’re vested), so you should try to take full advantage of them. If you fail to make contributions and receive no match, you are actually walking away from money your employer is offering to you.

Another feature that many 401(k) plans offer is the ability to borrow up to 50% of your vested balance (or $50,000, if less) at a reasonable interest rate. You can use a plan loan to pay off high-interest debts or meet other large expenses, like the purchase of a car. You typically won’t be taxed or penalized on amounts you borrow as long as the loan is repaid within five years. Repayment may be required within a shorter time frame, however, if you leave your employer. Loan payments are deducted from your paycheck with after-tax dollars.

Finally, 401(k)s are a very convenient and reliable way to save. You decide what percentage of your salary to contribute, up to allowable limits. Your contributions are deducted automatically from your paycheck each pay period. Because the money never passes through your hands, there’s no temptation to spend it or skip a contribution here and there. Most plans allow for contributions as small as 1% of your pay.

Note: Your employer may also allow you to make after-tax “Roth” contributions to your 401(k) plan. Because your Roth contributions are after tax, they don’t reduce your current income like pre-tax contributions. But because they’re after-tax, your Roth contributions are always tax free when paid out to you. But the main attraction of Roth 401(k) contributions is that the earnings on your contributions are also tax free if your distribution is “qualified.” In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 401(k) contribution, and you are either 59½ or disabled when you receive the payment.

What is vesting?


Vesting occurs when you acquire ownership. Does your employer offer a retirement savings plan such as a 401(k), traditional pension, or profit-sharing plan? Did you receive a stock option grant as a year-end bonus? These employee benefits and others like them are often tied to a timeline known as a vesting schedule. The vesting schedule determines when you acquire full ownership of the benefit.

For example, your employer grants you 10,000 stock options as a thank-you for a job well done, but it may not be time to go mansion shopping just yet. The options may not actually be yours until you’re vested. If the options are subject to a vesting schedule, you don’t actually own the right to exercise your options until some time in the future. Some stock option plans allow for immediate vesting, while others may delay vesting. Consider these three alternatives for a four-year vesting schedule:

  • 25 percent each year
  • 50 percent in years two and four
  • 100 percent in year four

In addition, there are two permissible vesting schedules for employer contributions to most 401(k) and other defined contribution plans:

  • Cliff vesting: This provides no vested benefit until the third year. After three years of employment, you reach the “edge of the cliff,” or vest 100 percent.
  • Graded vesting: This provides no vested benefit until year two. For each additional year that you remain with your employer, your benefits vest 20 percent each year. Under this schedule, you’ll be 100 percent vested if you remain with your employer for six years.

Keep in mind that if your employer follows the 100 percent in year-three vesting schedule, you’ll need to stay with your employer for three years before you are vested. Of course, any personal contributions that you make to your employer’s savings plan are automatically fully vested and remain yours no matter how long you stay with the employer.

Defined benefit (traditional pension) plans can have a five year cliff vesting schedule, or a three to seven year graded schedule.

Keep in mind that your employer’s plan can provide for faster (earlier) vesting than the law requires. And in some cases, faster vesting is required by law (for example, employer contributions to a SEP, SIMPLE IRA, or SIMPLE 401(k) plan must be immediately vested). To find out about your specific plan’s vesting schedule, check with your manager or human resources representative, or read your summary plan description.

My company has a profit-sharing plan. How do these plans work?


A profit-sharing plan is a defined contribution plan in which your employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the participant (employee).

Your employer’s contributions to your account, and any investment earnings, accumulate on a tax-deferred basis–the IRS will tax these benefits as part of your regular income only when you begin receiving distributions from the plan, typically after you retire or terminate employment. Whether you can make withdrawals while you are still employed depends on the terms of your plan. For example, some plans permit withdrawals after you’ve attained at 59½, or after you’ve been a participant for some specified period of time (usually at least five years), or in the event of a financial hardship. (As an alternative to a taxable withdrawal, you may be able to borrow up to 50 percent of your vested account balance if your employer permits plan loans.)

Be aware that if you take distributions before age 59½, they are subject to a 10 percent penalty tax unless an exception applies. The penalty tax does not apply to distributions you receive after you terminate employment, if your separation occurs during or after the year you reach age 55. The penalty tax also does not apply in the case of distributions made due to a qualifying disability, distributions that qualify as substantially equal periodic payments, amounts you roll over to an IRA or another employer plan, distributions up to the amount of unreimbursed medical expenses, distributions made under a qualified domestic relations order (QDRO), or distributions after your death.

Each plan has a trustee who is generally responsible for managing the plan assets and for preparing various financial and tax documents. Other administrative duties are overseen by a plan administrator, who will frequently hire a third-party administrator to perform most administrative functions. Most plans contain a vesting schedule, often between three and six years, during which time an employee becomes fully vested in the plan. If you were to leave the company prior to full vesting and move your account elsewhere, you would forfeit all or a portion of the account’s accumulated value. Profit-sharing plans are usually funded using mutual funds, variable annuities, or life insurance. In certain cases, you may have the authority to direct the investment of the assets in your profit-sharing account. The summary plan description, available to each eligible participant, spells out the details of your plan.

I teach at a school that offers a 403(b) plan. Is this type of plan a good way to save for retirement? 


In general, yes. Also known as a tax-sheltered annuity, a 403(b) plan is an employer-sponsored plan designed for employees of certain tax-exempt organizations (e.g., hospitals, churches, charities, and public schools) to invest for their retirement. Typically, the employer purchases annuity contracts or sets up custodial accounts for eligible employees who choose to participate. A 403(b) plan is technically not a qualified plan, but it is said to mimic a qualified plan because it shares some of the same features.

Like a 401(k) plan, a 403(b) plan enables you to make contributions to the plan on a pre-tax basis. These are known as salary-reduction contributions because they come from your salary before taxes are withheld, thus reducing your taxable income. For tax year 2018, you are allowed to defer up to $18,500 a year or 100% of your compensation, whichever is less, to the plan. If you’re 50 or older, you can make an extra “catch-up” contribution of $6,000 in 2018 (additional special catch-up contribution rules may also apply). Employers will sometimes contribute to the plan as well, although employer contributions are generally not required and (if made) may be subject to a vesting schedule before you are entitled to them. Earnings (e.g., dividends and interest) on your 403(b) plan investments accrue tax deferred. Only when you withdraw your funds from the plan do you pay income tax on contributions and earnings. If you wait until after you’re retired to begin withdrawing, you may be in a lower tax bracket.

The combination of pre-tax contributions and tax-deferred growth creates the opportunity to build an impressive retirement fund with a 403(b) plan, depending on investment performance. You may even qualify for a partial tax credit for amounts contributed if your income is below a certain level. In addition, a 403(b) plan may allow you (under certain conditions) to withdraw money from the plan while still working for your employer. Beware of these “in-service” withdrawals, however. They may be subject to both regular income tax and (if you’re under age 59½) a 10% early withdrawal penalty. A plan loan, if permitted, might be a better way to obtain the cash you need.

Note: Your employer may also allow you to make after-tax “Roth” contributions to your 403(b) plan. Because your Roth contributions are after tax, those contributions are always tax free when distributed to you. But the main attraction of Roth 403(b) contributions is that the earnings on your contributions are also tax free if your distribution is “qualified.” In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 403(b) contribution, and you are either 59½ or disabled when you receive the payment.

Does the federal government insure pension benefits?


The federal government insures certain pension benefits. Specifically, it insures defined benefit plans (but not other types of retirement plans) through the Pension Benefit Guaranty Corporation (PBGC), a federal agency created by ERISA.

A defined benefit plan is a qualified employer pension plan that promises to pay a specific monthly benefit at retirement. Although the PBGC insures most defined benefit plans, it doesn’t insure defined contribution plans. Defined contribution plan participants have individual accounts, and these plans don’t promise to pay a specific dollar amount to participants. Examples of defined contribution plans include 401(k) plans and profit-sharing plans.

To find out if your defined benefit plan is insured by the PBGC, ask your employer or plan administrator. In general, though, your defined benefit plan will be covered unless it meets an exception. Plans not covered include those belonging to professional service corporations (e.g., doctors and lawyers) with fewer than 26 employees, church groups, and state and local governments.

If your employer’s pension plan is to be terminated, you’ll receive notification from your plan administrator and/or the PBGC. If the PBGC takes over the pension plan because your employer doesn’t have enough money to pay benefits owed, the PBGC will review the plan’s records and estimate what benefits each person will receive.

The PBGC guarantees that you’ll receive basic pension benefits up to a certain annual amount. This amount may be lower than what you would normally have received from your plan. For plans ending in 2018, the maximum annual amount is $65,045 (or $5,420 per month) for a worker who retires at age 65. If you begin receiving payments before age 65 or if your pension includes benefits for a survivor or other beneficiary, the maximum amount is lower. For more information on these amounts, please visit the PBGC web site.

Types of benefits guaranteed include the following:

  • Pension benefits at normal retirement age
  • Most early retirement benefits
  • Disability benefits for disabilities that occurred before the plan was terminated
  • Certain benefits for survivors of plan participants

Will my group health insurance cover my partner, even though we’re not married?


Check with your employer. A growing number of employers are offering domestic partner benefits, including health insurance, to the unmarried partners of employees.

If your employer does offer health benefits to your partner, but your partner is covered by other health insurance, you’ll need to decide whether it’s better to be covered under one plan or two. A major disadvantage of a domestic partner plan is that the health coverage your employer provides to your partner is taxable income to you on the federal level (but not always on the state level). You’ll need to compare both the cost of each plan and the coverages they offer, taking into account the additional income tax you’ll pay if you opt to be covered by only one plan.

Should my spouse and I integrate our health insurance benefits?


When you and your spouse are making this decision, it may be useful for you to focus on three key areas: (1) the out-of-pocket cost of each plan, (2) the levels of service and coverage offered, and (3) the coverage offered to any dependent children, if applicable.

Employers will sometimes pay some or all of their employees’ health insurance premiums. If this is true in your case, there may be no reason to consider a change in your health insurance plans. If you pay the premiums yourself, however, compare the costs. Check into whether family coverage through one of the plans is less expensive than two single policies. If you have no children, two single policies are typically less expensive than one policy with family coverage. Many large group plans offer two-person coverage (an employee plus spouse, partner, or child) for less than the price of a family plan. However, insurance carriers will not allow you to bill two companies for the same medical service.

Other important cost factors to consider are out-of-pocket deductibles and co-payments. Even if the premium you pay at your company is lower than that paid by your spouse, you may discover that your deductibles and co-payments for health problems and routine doctor’s visits are substantially higher. Despite the higher premiums, you may decide that it is better to join a family plan through your spouse’s employer because of its lower deductibles and co-payments.

Be aware that the services and coverage that one plan provides, including the choice of doctors and hospitals, could outweigh the lower costs of the other. You might decide that your family is better off to pay higher premiums, deductibles, or co-payments while receiving specific services (such as free eye exams) that the other plan does not offer.

Do I have to pay U.S. taxes when I work abroad?


If you are a U.S. citizen working abroad, you may be able to minimize what you owe in U.S. income tax if you qualify for the foreign income exclusion. If you qualify, you may exclude up to $102,100 in foreign income from U.S. income tax liability in 2017. If you are married, your spouse is allowed an additional $102,100 exclusion. To qualify, you and your spouse must satisfy the following requirements:

  • You must reside in a foreign country for an entire tax year or for at least 330 days during a 12-month period
  • Your salary must be paid by a company or agency in your country of residence or by a U.S. company operating in that country

Also, only earned income–salaries, wages, and fringe benefits, plus allowances and expenses for housing–qualifies for the exclusion. Dividends, interest, capital gains, pension or retirement distributions, and alimony do not qualify. If you are a member of the U.S. military or other government service and are living abroad, your income is not considered foreign income. You’ll have to pay taxes as if you were a taxpayer living in the United States.

Even if you avoid U.S. income tax, you will likely pay some form of income tax to the country in which you reside and earn a salary. Should you fail to meet its residency requirements, or if you receive income above the allowable exclusion, you’ll probably end up paying both foreign and U.S. income tax. If you do pay foreign income tax, you can apply for a separate U.S. tax credit (using Form 1116) in the amount of foreign income tax you are required to pay.

You’ll also owe U.S. Social Security taxes if your country of residence has no treaty to coordinate its social service coverage with the United States. However, if such a treaty is in force, you’ll pay foreign social service taxes to your host nation and will not be required to pay U.S. Social Security taxes. In addition, you may be subject to estate and gift taxes if you transfer property, no matter where that property is located. If you maintain a house in the United States, you may owe state income tax and local property tax. For more information, consult a tax advisor or contact the IRS at (800) 829-3676 or and request Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

I’ll be changing jobs next month, and I’m pregnant. Will I qualify for health insurance coverage with my new employer?


That depends on several factors. If your new employer offers a group health insurance plan, the federal Health Insurance Portability and Accountability Act (HIPAA) may apply. This act prevents your new group health plan from treating your pregnancy as a pre-existing condition if you were covered by group health insurance through your previous employer. But read your new policy carefully. Although most health plans cover maternity care and pregnancy, in some instances the health plan offered by your new employer may not include such coverage. Unfortunately, you won’t qualify for the protection offered by HIPAA if you had an individual (nongroup) health policy or if you had no health insurance at all.

Even if your new employer’s group plan includes pregnancy and maternity care, you may be subject to a waiting period before you become eligible for coverage. So, if you need prenatal care during this period, you may need to pay for the doctor’s visits out of your own pocket. Remember that you may need more care near the end of your term. You may be able to continue health coverage through your previous employer under the Consolidated Omnibus Budget Reconciliation Act, but you’ll have to pay the full premiums yourself.

Of course, your new company may not provide health insurance coverage, in which case, you’ll probably have to shop for individual health coverage. The Patient Protection and Affordable Care Act requires that health plans in the individual and small group market (that are not considered grandfathered plans) offer minimum essential health benefits including maternity and newborn care. And, if you can’t find an individual health insurance policy that will cover you at an affordable price, you can shop for and purchase a health insurance plan that will cover your pregnancy through either a state-based or federal health insurance Exchange Marketplace.

So, before you take a new job, make sure that you understand the coverage and eligibility requirements of your new employer’s health insurance plan. Plan carefully for the protection of your health and the health of your baby.

I’m looking for a job. How can I tell if an employer is offering a good insurance benefit package?


I’m looking for a job. How can I tell if an employer is offering a good insurance benefit package?


Ultimately, an employer is offering a good insurance benefit package if it’s one that appeals to you and meets your needs. But here are some specific things you might look for.

Perhaps the most important piece is the health insurance offered. You’ll want coverage that adequately meets your medical needs. Hopefully, it will also allow you to continue seeing your current doctors and health-care providers. A complete package would offer dental, vision, and prescription drug coverage as well. And don’t forget to find out how much you’ll pay for health insurance–ideally, the employer will pay all or most of the premium cost for a single person.

Most large employers offer some group life insurance coverage. A basic package would provide term insurance coverage on your life in an amount at least equal to your annual salary. A more generous package would provide coverage for your spouse, domestic partner, or children, and would allow you to purchase low-cost supplemental life insurance.

If you get sick or injured and can’t work, disability insurance replaces a portion of your income. Many employers offer short-term disability insurance that covers you for up to two years, but a good benefit package will also include long-term disability coverage. Again, the best package is one for which the employer pays all or most of the insurance premium.

Finally, a good benefit package might also offer you the chance to buy other types of coverage (e.g., long-term care or auto insurance) at group rates.

Do long-term disability insurance premiums depend on the nature of my job?


Do long-term disability insurance premiums depend on the nature of my job?


Yes. If you have long-term disability coverage through a group plan offered by your employer, your premium will be the same as the premium of everyone else who participates in that plan. But, the premiums for everyone will depend on the general risks of the industry in which the employees work. If you’re buying an individual policy, your profession will also determine your premium. The difference is that many other personal factors will affect your premiums, such as your health, income, hobbies, and so on.

Common sense (and statistical data) indicates that some jobs are more dangerous than others. Construction workers, police officers, firefighters, and miners are more likely to be injured on the job than are architects, artists, or sales professionals. If you work in a high-risk occupation, you may be denied individual disability coverage altogether. Or, you may be offered it only at a very high premium. The insurance company will group your job in a risk category based on your duties and the industry’s claims experience with people in that occupation. All other factors being equal, the higher the claims rate by individuals in your profession, the higher your premiums for long-term disability insurance are going to be.

I drive my own car on company business. Whose insurance pays for damages if I get into an accident?

Question:I drive my own car on company business. Whose insurance will pay for damages if I get into an accident?

Answer:It depends. If you get into an accident with your own car while on company business, your own auto insurance policy will probably cover the damages first. Then, if your company has a commercial auto insurance policy, this policy should probably cover any remaining expenses. In some cases, the commercial policy might provide the first level of coverage, depending on the way it’s structured. The first step is to find out whether your employer has a commercial auto insurance policy (it probably does if it requires employees to drive their own cars on company business). If so, find out which policy would kick in first in the event of an accident.

If you’re self-employed, you have a couple of options to protect against the financial risk of car accidents. First, you can increase the liability coverage under your own auto policy. Second, you can purchase your own commercial auto insurance policy. You might want to consider this option if you use your car primarily for business-related driving. For more information, contact several insurers and describe your situation.