1. I’m still working, but if I lose my job I’ll need my savings to pay my bills. Should I stop putting money into my 401(k), which has tanked?
A. If you think you may lose your job, and you have less than three months’ worth of your gross income in a savings account (e.g., less than $15,000 in savings if you earn $60,000 annually), you should consider stopping your 401(k) contributions, says David Hefty, a certified financial planner and CEO of Cornerstone Wealth Management in Auburn, Ind. But make sure you stash away the extra money that would have gone toward your contribution. If you already have three months’ worth of savings, then you should continue your 401(k) contributions and take advantage of any employer match.
2. My company has required its employees to take time off, without pay, to cut costs. Can I get unemployment benefits to cover the loss of compensation due to this furlough?
A. In most cases, employees required to take a furlough may be eligible for unemployment benefits. Check with your local unemployment agency in advance to see whether you qualify, since benefit eligibility varies by state.
3. Will I have to pay tax on my unemployment compensation?
A. Yes. Unemployment compensation is taxable on federal and most state tax returns. When you apply for unemployment benefits, you can choose whether to have federal and/or state income taxes automatically taken out of your benefits. Federal income taxes are withheld at a 10 percent rate; state tax rates vary. If you chose not to have taxes taken out, you may find that you owe money come next April. However, there is some relief under the new economic stimulus package: Unemployment benefits up to $2,400 will be tax-free.
4. Can I collect both unemployment insurance and severance pay from my company?
A. Since labor laws vary from state to state, the answer depends on where you live. In most cases, you cannot collect severance pay and unemployment benefits for the same weeks. But your unemployment benefit year will be extended by the number of weeks for which you received severance pay.
Moreover, the government’s economic stimulus plan that passed earlier this month has raised weekly jobless benefits by $25 for the rest of this year. It also extended unemployment benefits to 33 weeks from the standard 26 weeks offered by most states, and to as much as 59 weeks in states hardest-hit by job losses.
5. Will my unemployment benefits be affected by my pension payout or my Social Security benefit?
A. If you got laid off by your current employer and you’re drawing a pension from a previous job, your unemployment benefits eligibility should not be affected, says Mark Steber, vice president of tax resources for Jackson Hewitt Tax Service in Sarasota, Fla. However, the amount of benefits awarded may be affected by other income coming in. The same is true for Social Security benefits. Eligibility and benefit amounts are based on state rules, so you should check with your state unemployment office to see how your benefits would be altered.
6. I’m thinking about taking my Social Security benefit early. Is this wise?
A. It depends on your financial circumstances and on whether you can live comfortably without taking your benefit, says Frank Jaffe, a certified financial planner with Access Wealth Planning in Roseland, N.J. Here’s how taking your benefit early compares with waiting until your full retirement age or later: At 62, you would collect about 75 percent of your full retirement pay. At 66, you would be eligible for your full benefit amount. If you waited until age 70, your benefit would be about 32 percent higher. So a monthly benefit of $750 at age 62 would grow to $1,000 at full retirement age and climb to $1,320 at age 70.
Something else to consider: If you think you’ll live into your 90s, it pays to wait until 70 to take your benefit. Not only will you come out ahead in the payout, Jaffe says, but you may well exhaust your other assets and need the higher benefit amount to pick up the slack.
7. I’m out of work and can’t afford COBRA for my family. What can I do?
A. The new economic stimulus package will make it easier for unemployed people to afford extended health benefits under COBRA, a federal law that allows workers to continue group health insurance when they leave a job. Many people eligible for COBRA opt out because the plan can be so costly. But now, as part of the new package, if you lose your job between Sept. 1, 2008, and Jan. 1, 2010, you will be able to keep your company health insurance for nine months by paying 35 percent of your COBRA premiums.
If that’s still too expensive, you may be eligible for the federal Medicaid program, or your children may qualify for the federally supported State Children’s Health Insurance Program (SCHIP). This program provides, at low or no cost, insurance that pays for doctor visits, prescription drugs and hospitalization. Each state has different eligibility rules, but in most states uninsured children 18 and younger whose families earn less than $34,100 a year (for a family of four) are eligible.
In some states, the parent of a child who receives SCHIP is also eligible for coverage. To learn more about the Medicaid and SCHIP programs and to locate the toll-free phone numbers for your state, go to the Centers for Medicare & Medicaid Services’ website.
8. Can I claim the money I spent on job searches as tax deductions?
A. Yes. By declaring miscellaneous itemized deductions, taxpayers may lower their taxable income for the year, says Steber. Some examples of what’s deductible: expenses related to creating, printing and mailing a resumé; fees for a career coach or headhunter; long-distance or cellphone charges directly associated with a job search; transportation to an interview (taxi, train, plane or mileage costs); and meals and lodging if the interview was out of town.
Miscellaneous itemized deductions must be more than 2 percent of your adjusted gross income (your gross income less certain allowed business-related deductions). So if your adjusted gross income is $40,000, Steber says, you can take all miscellaneous deductions in excess of $800. Remember to keep your receipts to document your expenses.
9. I was laid off and took money out of my 401(k) plan to help pay bills. I’m 57. Will I owe taxes on that withdrawal?
A. Most likely. Generally, if you make a withdrawal from a qualified retirement plan, such as a 401(k) or IRA, and that money is not paid back within 60 days, you will owe taxes on it. Because you made the withdrawal before reaching age 59 1/2, you’ll be subject to a 10 percent penalty. For more information, go to the IRS online and see Publication 575, “Pension and Annuity Income.”
10. I’m between jobs and do freelance and consulting work to get by. Will I have to pay taxes on that income?
A.Yes, you’re subject to federal income tax and self-employment tax onthat income. But on the bright side, you’re also eligible to takeadvantage of a host of deductions related to your business: home officeexpenses, including the purchase of equipment, paper and postage;expenses related to business meals, entertainment and travel; cellphonecharges and other expenses. Remember that it’s important to keepdocuments and records of the expenses you itemize.
11. What happens to my pension if my company goes bankrupt?
A. The good news is that company-sponsored defined benefit plans are generally protected under the Employee Retirement Income Security Act. So if your company went belly-up, the federal Pension Benefit Guaranty Corp.(PBGC) would step in to pay your pension benefit. The bad news is thatthe payout is capped—in 2009, workers who retire at age 65 are eligibleto receive up to $4,500 a month, or $54,000 a year.
Among pension plans typically not covered by the PBGC are those offered by “professional service employers” such as doctors and lawyers with fewer than 26 employees; plans sponsored by church groups; and plans sponsored by federal, state or local governments. The PBGC does not insure defined contribution plans, such as profit-sharing or 401(k) plans. To find out if your plan is covered, check with your plan administrator or ask for a copy of the summary plan description. (See more on this topic from AARP.)
12. Where can an older person like me go to find a job?
Carole Fleck is a senior editor for the AARP Bulletin.
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