How To Cope With A Loss Of Income Right Now

Is your household struggling with less income during this pandemic? Whether you or your spouse owns a business that you can’t fully operate, have found yourself laid off or furloughed, or are a gig worker with reduced hours, you’re not alone. As social distancing puts a freeze on large parts of the economy, an increasing number of Americans are finding themselves with lower or no income. Here are some steps you can take to reduce the financial impact:

1) File for unemployment benefits. The first thing you’ll want to do is to replace as much of your income as possible and a good place to start is by filing for unemployment benefits from your state. How much and how long you’ll collect varies by state, but benefits are typically 50% of your previous income up to a cap and generally last about 26 weeks or half a year. Fortunately, the eligibility and amount of benefits have been temporarily expanded due to the pandemic.

2) Make sure you’re covered by health insurance if you lose your job. Your income isn’t the only thing you’ll want to replace. You’ll also want to make sure you’re covered by health insurance, especially with the added risk of getting infected with COVID-19. If you’re married, see if you can get covered under your spouse’s plan. Another option is to continue your current health insurance under COBRA for 18-36 months, but the insurance is likely to be more expensive than what you paid as an employee.

Finally, you can enroll through the Health Insurance Marketplace and possibly qualify for subsidies based on your income. These options have deadlines to enroll after your employment ends so don’t delay. (If you have an HSA, you can use it to pay health insurance premiums tax-free while you’re collecting unemployment benefits.)

3) Don’t forget life insurance. While it may not feel as urgent, it’s important to make sure your family continues to be protected by life insurance as well. You may be able to continue any coverage you had under your employer if the policy is portable. If not, you can use this calculator to estimate how much insurance you should have and search for low cost term life insurance policies here.

4) Get a handle over your budget. Start by going through the last three months of your bank and credit card statements and record your expenses on a worksheet like this. Once you know where your money is going, look for places to cut back. (Social distancing may already be saving you money on things like gas, eating out, and travel plus your federal student loan interest and payments are suspended until Sep 30 th .)

If you’re still having trouble making ends meet, make sure you prioritize your rent or mortgage payments, basic utility bills, car payments, and food and medical care over payments on unsecured debt like credit card bills. Keeping a roof over your head, the lights on, your car in the driveway, food on the table, and you and your family healthy are all more important than your credit rating. See if you can negotiate an affordable payment plan with your creditors or work with a non-profit credit counseling agency to negotiate for you. (Creditors may be more willing to work with you right now and if you live in a home with a federal-insured mortgage, you may be protected from eviction or foreclosure for a period of time.)

5) Decide what to do with your former employer’s retirement plan. The three basic options are to leave it there (if they let you), cash it out, or roll it to an IRA. Leaving your plan where it is can make sense if you want to keep a unique investment option that you can’t purchase anywhere else or if you have employer stock that you’d like to eventually withdraw at a lower tax rate. Cashing out your plan rarely is the best option since you’d have to pay taxes on any pre-tax money plus a 10% penalty if you’re under age 55. Rolling your account into an IRA can allow you to continue deferring the taxes while also providing you more flexibility in how the money is invested and withdrawn.

If you need to tap your savings, the CARES Act allows you to withdraw up to $100k from pre-tax IRAs and possibly your employer’s retirement plan with no tax or penalty if you or a close family member was diagnosed with COVID-19 or if you were adversely financially impacted by the pandemic. However, the money is taxable (but not subject to an early withdrawal penalty) if not repaid within 3 years. Keep in mind that you’ll also lose any earnings you would have made by keeping that money invested in your retirement account.

Otherwise, you’ll generally want to access your non-Roth retirement accounts last. Start with taxable accounts like bank or regular brokerage accounts. Then go to any Roth IRA contributions you have since they can be withdrawn tax and penalty-free. (However, that’s still just a next-best option since you sacrifice the potential for tax-free growth.) Only after those options are exhausted, should you consider dipping into retirement accounts that would be subject to taxes plus a 10% early withdrawal penalty.

Of course, the most beneficial thing you can do after a layoff is to find a new job so don’t forget to update your resume, get in touch with your network (virtually of course), brush up on your interviewing skills, and start job hunting. When you do land a new job, try to build your emergency savings up to 3-6 months’ worth of expenses. At least now you’ll have a better idea of just how beneficial that is!

This article was written by Erik Carter from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.