Originally concept of education IRAs was meant to provide a tax-deductible benefit that would defer taxes on contributions until time of withdrawal, but accounts were limited in size to only $500 per year. Due to small allowable account size, these Education IRAs were not very popular with savers of financial institutions. Then in 2001 amount of allowable contribution was increased to $2,000 for individuals with an income up to $95,000 or couples filing jointly with an income up to $190,000. But contribution is not deductible from taxable income for federal income tax purposes in same manner as a traditional IRA account.

THE RETIREMENT PLAN There is one universal rule when it comes to handling your retirement plan: do not cash in your retirement plan directly even if you know that you must use cash immediately. This rule applies regardless of whether your retirement plan is a self-directed 410(k) or a company-controlled pension plan. First roll it over into your own IRA account and then withdraw money from IRA as you need it. This will lower your overall tax bill, make more cash available to you now and postpone date that tax you owe is actually due. The IRS makes many allowances for individuals to withdraw money from an IRA to pay for expenses while unemployed but these provisions are not available if you simply cash in your employer’s retirement account plan.

If you have outstanding loans on your 401(k) plan, ideal situation is to refinance prior to losing your job. See notes on “cash flow” section below.

To illustrate point, consider following simplified example of two people Jack and Sally, who each have a $10,000 401(k) plan. Jack cashes in his 401(k) plan immediately, while Sally does a rollover to an IRA and then withdraws money after making a strategy with her financial adviser to take full advantage of tax saving features of IRA withdrawals. Sally has $2,000 more cash available to her immediately, and ultimately (assuming some very bright financial planning) owes $1500 less tax than Jack.

Jack’s 401(k)Sally’s IRA Account Balance$10,000$10,000 Tax Withholding Amount2,000$0 Cash Available$8,000$10,000 Early Withdraw Penalty$1500$0 TOTAL TAX$4000$2500

There are many firms that handle these retirement plan rollovers at no charge to you. Some firms also offer tax planning that will allow you to minimize tax bite while still using as much cash as you need to carry you until your next job. It makes sense to use a firm that assigns a financial adviser that you can rely on later for tax and other advice.

STOCK OPTIONS More people have been financially hurt by stock options in past 24 month period of lagging stock market performance than any other type of benefit plan or financial vehicle. When combined with a loss of employment in a suffering economy, combined effects can be devastating. Stock options are a great benefit in a rising stock market, but can be an unexpected bombshell in a market downturn. This is because income taxes on stock options are usually triggered before you actually receive any cash from stock options. If stock price declines sharply before you sell, you still owe tax on higher value. In many cases tax you owe can be greater than amount you receive from selling your stock or stock options.

To complicate matters even further, stock options are one of primary triggers of notorious “alternative minimum tax” (AMT) that catches many taxpayers by surprise. If you find yourself suddenly subject to AMT, then this might have major implication in your taxes for at least several years into future due to “future credit” feature of Alternative Minimum Tax if you received type of options known as “incentive stock options”. This can be a much bigger deal than many people realize. Many people who do not complete their financial planning prior to exercising a stock option wind up paying tens of thousands in taxes that might have been avoidable.

Many stock option plans have a provision that causes options to be exercised at termination of employment. This means that you have little control over timing or financial terms of transaction. In other cases, a terminated employee may exercise options to raise cash in preparation for losing a salary. In either case, you must act quickly in order to protect yourself from market risk and adverse tax effects. The most successful financial planning strategies involve these steps: 1) timing transactions to minimize tax consequences, 2) matching gains and losses for maximum tax efficiency, 3) AMT neutralization and 4) diversifying or insuring investments to protect from market movements.

HEALTH COVERAGE Federal law known as COBRA guarantees that you can keep your medical insurance coverage for up to 18 months if you work for a company with more than 20 employees. But there are many details of this coverage that you should be familiar

If your company has less than 20 employees, then COBRA coverage is not available to you under any circumstances. Sometimes an employer may make an arrangement to continue to provide you with group health coverage after your employment is terminated. This is a dangerous situation. If COBRA coverage is not available to you under federal law and insurance company later learns of a claim on your policy, then insurer may immediately terminate your insurance coverage and deny responsibility for paying any further claims. The insurer even has legal right to rescind coverage retroactively back to your date of termination of employment. While most insurance companies do not strictly enforce these severe penalties, it just is not worth taking risk with your health insurance.

If you are not sure if COBRA applies (for example, your company has had less than 20 employees in past but has recently grown to more than 20 employees) you should put your request for COBRA coverage in writing to your employer and insurance company. Usually they will err on side of caution and offer you COBRA coverage but this action will not be taken unless prompted by your formal request.