Even for an established professional, being between jobs can be a financially harrowing time. Fortunately, there are ways to minimize the damage that most people don’t know about.
Bill LaChance, a financial planner, knows how, both because he is a trained accountant, versed in the art of reducing tax obligations, and because he recently went through a pretty big career transition himself.
LaChance will speak at the Professional Service Group on Friday, September 30, from 9:45 a.m. to noon at the Princeton Public Library. For more information about the free event, visit www.psgofmercercounty.org.
For many people who find themselves between jobs, one of the largest expenses is health insurance. When you lose your employer-provided healthcare, the law allows you to continue your coverage under COBRA. But under COBRA, you have to foot the entire premium, with no help at all from your former employer. This can make an average health insurance plan cost thousands a month. “When people go on transitions, they automatically sign up for COBRA, not realizing that in many cases they would qualify for a subsidy if they would go on the healthcare exchange.”
With the open enrollment period between November 1 and January 15, anyone can opt to sign up for Obamacare instead of COBRA and potentially save thousands. “It can be huge,” LaChance says. “I have clients who were paying $1,500 a month who ended up paying $300 to $400 a month.”
There’s another wrinkle to signing up for an Affordable Care Act plan, though. The application asks you to list your income, and many people list it assuming they will have a job in a few months. LaChance says this is a mistake because subsidies are available based on income. The less income, the lower premiums you have to pay. If income is low enough, there are also subsidies for deductibles, co-pays, and other expenses. If you underestimate your income, you can always go back and pay the extra premiums you owe. However if you overestimate your income, you can get a rebate on the extra premium you paid, but you can’t get a rebate on the deductibles and co-pays.
The healthcare subsidies are one realm where people in transition can use the progressive tax structure to their advantage. Having low income for a year, perhaps even as little as collecting unemployment, means paying far less income tax than a normal year. On the other hand, compensation when leaving a company can add up, putting you in a higher tax bracket. “When someone is working the same job year after year, there really is no shifting tax brackets,” LaChance says. “But if you’re paid out severance, deferred compensation, and accrued vacation all of a sudden, you have huge income for the year. The next year if you don’t get a job, it goes down to almost nothing.”
LaChance says that wherever possible, it’s best to shift income from the prosperous year into the lean year, when your income will be taxed at a lower rate. This is where all kinds of financial planning tricks come into play, like paying property taxes and mortgages in either December or January depending on which is more advantageous.
A related tactic is to use the low income year to convert IRA retirement funds to Roth IRAs. Since Roth IRAs are not tax deductible when you contribute to them and are tax free when you withdraw them, and IRAs are the opposite, it makes sense to pay the taxes in a year of low income, such as during a career transition.
Of course, all this advice assumes you are fortunate enough to have a good job and some savings in the first place.
LaChance picked up some of his expertise in this field during his long career as an accountant. He grew up in a poor family in Connecticut, where his mother was a bank clerk and his father was disabled and didn’t work for most of his life. When it came time for LaChance to go to college, he had to pick a major where there would surely be a job waiting for him at the end. That major was accounting. “I never loved accounting,” he says.
After graduation, went to work for a firm in Stamford, Connecticut, and got an MBA in finance, graduating just in time for the 1991 recession to bring a tight job market. He took a job in corporate finance with Target in Minneapolis, where he stayed for 22 years.
“I didn’t like that either,” he said. Eventually his job was eliminated, which gave him a shot at doing something he liked for a change.
In 2014 LaChance became a financial planner and started a practice, WJL Advisors, in Chatham. He is paid only by his clients —about $500 for a two- or three-hour session, at the end of which he creates a financial plan. Because he is paid by his clients, LaChance said he always acts in their best interest, as opposed to financial planners who are paid to sell certain financial products to their clients. (Congress is currently considering a law that would make financial planners have a legal fiduciary duty to act in the interests of their clients.)
In his business, LaChance’s niche is advising people who are in career transitions. He finally has a job he likes doing. “This, I love to do,” he says.