Expat? Prepare for troubles.

It is a well-known fact, that many American citizens choose to live abroad because of different reasons: cost of living, family related, political preferences. Some people just want to discover the world on their spare time, or work for foreign employer. According to the official sources, over 8 million non-military Americans are living outside US. There are plenty of useful Internet resources for expats, with focus on various aspects of life. We already explored tax challenges for US citizens living abroad in this article. Now, I would like to discuss how to prepare for extended time spent outside of the country. This is the first and very important step for each expat, with plenty of details which may not always draw attention. Some steps are relatively simple and straight, others may present a real issue for those not familiar with a subject.

Preparing for the life in foreign country can be a challenging experience. By looking over the Internet, one can find plenty of advises. According to people familiar with the subject these are the most important steps in preparation process:

  • decide whether your move is temporary or permanent: other steps depends on this decision
  • estimate how much money would be required to maintain a familiar life style in a foreign country, and identify funds available to cover expenses
  • make sure the US Passport (and possibly Driver’s License) are valid for extended time: it can be a challenge to renew them while outside of the country
  • make copies of important documents
  • get familiar with health care system and immigration law in a country of destination: obtain insurance/visa if required
  • for those who own a property, figure out what to do with it: sell, rent out or let it stay empty
  • for those who own a car: sell it, ask someone to drive it regularly or prepare for long term storage, also update/cancel car insurance and take care about registration
  • take care about mail: forward it to some other address, or ask someone to collect it in your absence
  • find out how to stay connected with banks, brokerage firms, US government and tax collection authorities
  • study tax law in a country of destination, explore how to avoid double taxation since US citizens must pay tax anywhere in a world
  • collect credit and debit cards with no Foreign Transaction Fee from banks or credit unions friendly to expats: it is better to have at least 3-4 cards, to make sure at least one of them would work
  • cancel Internet service, home and cell phone plans: set up virtual US phone number, learn about international and local cellular providers and services
  • prepare a supply of necessary medications, do research if they are available in a foreign country: if not, find the replacement
  • cancel utilities, all non-essential services and memberships

While some of the steps seems trivial, others may require a separate article. Here, I would like to discuss a few of these points in more details.

Car storage and insurance

Obviously someone may consider keeping the car, especially when there is a place to store it. It is definitely a right choice to drive the car regularly for a short time. But just in case nobody is available for this exercise or you plan to be out of country for extended time, it is OK to leave it as is. Car battery must be disconnected for a long term storage. Otherwise, leakage current will completely drain the small battery which start the engine. It really does not matter if it is electric or gas car. In order to maintain a charge in the large electric vehicle battery, some sources recommend leaving it connected to the outlet. But this solution is for a relatively short absence and for a car stored in garage. It would take a long time for large battery to drain, a year or so. Still, it may be safer to store a gas than electric car due to various risks associated with a large battery. Selling the car would be still a better option for those who plan to be absent for years.

It is also better to have a limited insurance in case of car storage, because any gap would cause a premium increase later. Most insurance companies has a special rate for vehicles not in use. Also there are insurers which provide a rate per mile, such as Metromile for example. Car registration needs to be updated as well.

Home address

At this time, we all prefer to receive the bills and other important documents online in electronic format. But there may be exceptions such as credit or debit cards, state or federal government official communication including driver license or jury duty notice. They still come with regular mail, and can not be just ignored. How to handle them, while away from home? USPS has a service to hold mail during one month, which would not work in our case.

First, let us consider the case when expat still owns the residence but nobody live there. In this case, the best option would be to ask a trusted relative, friend or a neighbor to collect everything directly from the mail box. Also it would involve finding important letters, scanning them and sending the scan by email.

But what if the residence has been sold or rented out? Or there are no trusted people available around to collect mail right from the mail box? The next choice would be still to find someone trusted preferably living in the same state, and forward mail to that address. USPS provide a service to forward mail to another residential address in US for one year. Therefore, in addition to mail forward it is important to update address records with DMV, banks and other institutions. Be aware that Jury Commissioner’s Office receives the address from DMV or County Voter Registration Office.

Still, there might be the case when nobody is available or trusted to take care about the mail. The third option would be to rent a private virtual mail box. The service is not free, but they would register every piece of mail and by customer choice scan and send out by email anything of interest. Typically, such a service provide an ordinary mail address (not P.O. Box) in a state with no tax like TX for example. There are companies in service for many years and trusted by most customers: Post Scan Mail, Virtual Mail Box or US Global Mail.

Are there any potential problems with these three options? The first option which assume that someone would collect mail right from existing mail box would work fine, as long as the residence has not been sold or rented and it is possible to find someone local for this effort. It is also OK in most cases to forward/update mail to other residential address. However, some institutions may ask for verification with utility bill: ETrade and Schwab are known for that. Virtual mail box would likely be provided with a non-residential address in other state, which may not be accepted by certain brokerage firms or banks: details will be discussed in the next topic of this article.

Managing finances

It is always advised to keep existing bank accounts, credit and debit cards while living abroad. The Foreign Account Tax Compliance Act (FATCA) and Patriot Act made an expat’s living a real challenge. It is hard for US citizen to open account in a foreign bank, because bank does not want to deal with FATCA compliance policies. But even worse, multiple US brokerage and bank accounts has been closed for citizens living outside of country. This is the main reason, why it is essential to keep US address for those organizations. As described above, there are at least three options for that. But still there is another problem: how to access bank accounts from the foreign country. Well known large banks and brokerage firms keep track of IP address, and they particularly do not like when someone registered with US address attend the web page from other country on a regular basic. This problem can be solved with trusted VPN service. One option is to use a shared IP from VPN which is associated with data center within US in the state matching the mail address of account holder. But some banks like Bank of America for example allow access to their accounts from residential IP only. There are VPN services providing a static IP for additional fee, which is recommended in this case. ExpressVPN, NordVPN and TorGuard are among the most well-known and trusted providers of virtual network.

Brokerage firms load expats with even more problems. US citizens living abroad are not allowed to invest in mutual funds, broker CDs and some other types of investments. In fact, some brokers such as ETrade or Vanguard are known for retirement accounts closure. Again, US address and VPN service are here to help. Also Schwab has international package designed specifically for those living in other countries. It is even possible to provide a foreign mail address in this case. However opportunities for investment in this package are limited. Still, it may be the only solution for people moved to other country for extremely long time or forever.

Credit and debit cards

While expats are facing problems to open account in foreign banks, US credit and debit cards are essential for living. It is important to prepare at least 3-4 different credit cards without foreign transaction fee. I did have a great experience abroad with the PenFed cards. At the moment, their platinum rewards card also provide a superior cash back for groceries. As regarding debit cards, Fidelity and Schwab really stand out of competition for ATM cash withdrawal: they even pay back ATM fees imposed by local bank. But cash management account is required. Sadly each card has an expiration date. Replacement card will be sent using US mail address. It might be difficult and expensive to collect a physical card, as someone must send it by international mail. By that reason, virtual payment systems like Apple Pay, Google Pay or Samsung Pay can be really handy in this situation. All they need are credit or debit card credentials, no real card required. These systems are already deployed in many countries.

The only alternative access to money beyond the cards would be wire transfer, but it is hard to accomplish without a local bank account. It may be a reasonable choice to consider Transferwise for those fortunate who managed to establish an account in foreign bank, due to their low cost transfers outside of US. Schwab, HSBC, Citibank, Alliant and Navy Federal are among expat friendly banks and credit unions recommended for international affairs.

Phone service

Finally, a few words about the phone service. Obviously US cellular service providers either does not work abroad, or charge ridiculous fees. GoogleFi is an exception, as it provide a data service at a reasonable cost in most countries. But you stuck to pay a monthly fee for voice service which is never used. Therefore, better solution would be to make sure cell phone is compatible with country’s standards and buy a local SIM card: in most countries, cellular service is much cheaper than in US. In order to keep US phone number, Google Voice is the best solution. Install Hangouts on a cell phone or tablet and enjoy free calls to and from US. Just in case if Google Voice by some reason is not available, Vonage also provide a free US number and there is no need to buy their service.

As discussed above, there are multiple challenges often faced by expats. But with a careful preparation, it is possible to address them well in advance and live a prosperous life in the country of choice.

CD ladder: better than nothing?

Today, I would like to discuss Certificate of Deposit (CD). As you may already know, this is basically a savings certificate issued by commercial banks with interest rate fixed till maturity date. CD is actually a debt issued by bank to raise money. Higher interest rate is typically attached to longer term before the maturity. Before the maturity date, money availability is restricted. Usually, owner must pay a fine to withdraw the money before maturity date for CD sold directly by bank or credit union. Therefore, it is better to keep money till maturity. The good news is that deposits are FDIC insured, which means there is virtually no risk of loosing money. The bad news is that CD earns less money than other types of investments. Apparently, this is one of the most conservative forms of investment, with minimal risk and minimal return.

Why would anyone be interested in CD? It depends. For many years since the last recession, CD interest rate barely reached 0.5%. Together with great gains in a stock market, it appeared as a really bad idea to invest into CD due to historic low return. But situation changed. In year 2018, we were living in a different environment with Fed’s interest rate hike every quarter and stock market moving into a bear territory. At this time, investing into CD might be a good idea. But still many questions remain. What will happen with interest rate during the next 2-5 years? How much additional tax to pay, if someone is already in high tax bracket? What if there is a real need for money before the maturity date?

Investor in a high tax bracket may actually consider buying brokerage CD. They are sold by Fidelity, Vanguard and other brokers. Broker buy those deposits from banks. The rates are actually a bit higher than CD sold directly by bank. Brokerage CD may be purchased within IRA or other retirement accounts, which makes them tax efficient. But there are a few things to watch. First, make sure CD is FDIC insured. Deposits sold by US banks are typically insured. Second, look for call protected CD. Primary issuer may call CD back before the maturity date to lower interest rate, when Fed’s rate is too low. This will ultimately break a ladder. Finally, there might be new issue or secondary CD which are nearly identical. Secondary deposits are sold by broker with discount due to the investors who get rid of them before the maturity date. No penalty is applied, but principal may be lower than it would be at maturity date. This is a poor choice for a person selling CD before its term over, but good for a buyer who will experience a better yield.

For those in a low tax bracket, investing into CD is easy: choose a bank or credit union, transfer the money, determine the desired maturity date and buy CD. The only issue could be CD term, because 5 years may look to far down the road and 1 year may not have a decent interest rate. Exactly by that reason, CD ladder is designed. Break the entire amount of money into five equal parts, then buy five different CD: one for five years term, another for four, three, two and one year. After the shortest one mature, buy CD with the longest term which is five years in our example. Do the same with others, upon their maturity. Because of this approach, investor may enjoy a higher interest rate in future or consider investing somewhere else if stock market collapses. Of course, there is also an exposure to lower interest rate. But as it looks now, low interest rate is not likely to return for the next five years.

In order to account for future interest rate fluctuation, I consider five different scenarios for the next five years: always rising, rising then falling, stable, falling then rising and always falling. You can see the rate numbers in different colors on a graph. Of course, it is highly unlikely to have a stable rate, as well as always falling rate. The most likely scenario is actually a green curve, which reflects our current rising interest rate with a possibility to fall at some time when the next recession hit hard. Yellow curve is another possible but less likely scenario. I use 3.5% as a current interest rate for five years term CD, with 3.4%, 3.25%, 3.1% and 2.75% for four, three, two and one year respectively.

For the above scenarios, let us calculate $100K portfolio growth. It is easy to scale it to any other amount of money, closer to your portfolio. Single CD scenario means that all money come into a single five years term CD with current interest rate which is 3.5%, which is not a CD ladder. For a comparison, I also put the return by permanent and income portfolios during the past five years discussed in one of the previous articles.

What do we see? With most likely scenarios (green and purple colors) CD ladder will actually outperform a single CD. This is a great news, since as I already mentioned above it also provide a greater flexibility. Of course all deposits earn less compared even to the most conservative income portfolio. But the difference is not that significant. Also, please remember money invested into those portfolios are not FDIC insured and past performance is never guaranteed for a future.

It is always a personal decision, whether to invest into CD ladder or not. Under certain conditions, I would consider it as a decent conservative investment which may provide a little safe heaven from the great volatility of stock market.

Mobile payment benefits are real

At this time, I would like to discuss mobile payment systems like Apple Pay, Google Pay or Samsung Pay, These systems are typically associated with payments made via mobile devices, rather than card, check or cash. Mobile payments has been slowly adopted since year 2000, and as of now you can find plenty of merchants accepting mobile payments. It is worth to mention that mobile payments are not limited to mobile devices only (they may also be made using contactless cards, digital wallets, wearable devices, etc.), but right now I wanted to focus on three systems from major commercial providers mentioned above.

First and the most important aspect of these systems is that they do not replace fiat currency, cash or credit cards: mobile payment just provide a convenient and secure way to use them. One or more debit or credit card must be linked to the account, in order to deposit, withdraw or send money. As you may guess, card balances are being processed in the way identical to traditional usage. Also operations can be made in digital cash (such as Apple Pay Cash),  which are always supported by traditional banks. While most credit or debit cards can be used across the border, digital cash so far is limited to operations within one country.

Technically speaking, there are at least two main functions common across mobile payment systems:

  • digital wallet
  • in-store payment

Digital wallets are not limited to Apple, Google or Samsung: there are plenty of other providers such as PayPal, Square, Wenmo for example. Each service operates through the website or application on mobile device and requires debit or credit card to be linked to account. It allows sending money to other person using email address rather than bank account/routing number opposite to ACH or wire transfer. While this is definitely a better way for instant payments, I am still not convinced in their unique value in helping people to earn rather than spend their money. However, one system definitely has an edge and it is Google Pay. With Google, there is always a link between email and wallet account. Moreover, one person may have more than one account and send money between these accounts. It becomes handy, when dealing with interest checking accounts which require certain amount of money to be deposited or withdrawn every month in order to qualify for higher better rate. In this way, digital transactions actually replaces in-store or online purchases and helps to earn higher interest.

Other important function is in-store payments. While digital wallets were around for many years, in-store payment is a relatively new function limited to major providers of mobile operating systems and devices such as Apple, Google and Samsung. It requires support by merchant payment terminal, as well as use of certain mobile or wearable device. Lately most stores in US and across the world installed equipment for contactless payments, which include mobile in-store payments. In order to have impression about the availability of this technology, please check the data: as of November 2017 Apple Pay had support in 25 countries, Google Pay in 17 countries and Samsung Pay in 21 countries. The coverage is growing rapidly.

But in addition to merchant terminal support, there is a need for certain device in order to use the service. The list of supported devices is available: basically the device must have NFC (Near Field Communication) chip built into it. But while Google Pay can work with virtually any device with NFC running Android OS, Apple and Samsung Pay are limited to the devices made by respective companies. In order to understand the benefits, it is important to know how traditional payment system with credit or debit card works.

One important step is when merchant’s device read the card data and send it to acquiring bank for authorization. Therefore, merchant has all data which potentially can be vulnerable to theft. With mobile payments using NFC, the data are transferred using one-time secure dynamic code encrypted to hide credit or debit card information from merchant. It is also important that device can operate in offline mode during in-store purchase (no mobile data or wifi connection) to prevent actual card data to be sent somewhere by malicious software. This code is directly transferred to the bank and payment system network for further decoding and processing the payment. The decoding method is unique for each device and card, and established during the initial setup of payment system on that specific device. At this time, data connection is required.

One other important aspect of mobile payment systems is in their difference. While Apple Pay can function for in-store purchases completely offline for indefinite time, Google and Samsung Pay provide tokens for 10 in-store offline purchases. After that, device must be connected to Internet in order to receive another 10 tokens. Also, Samsung Pay can work not just with merchant terminals equipped with NFC reader, but with magnetic stripe as well. This may be important for US store chains, which did not install NFC support yet. Another aspect is security: Apple and Samsung systems seems more secure than Google, just because payment support built directly into their own devices.

It is easy to set up and use the system: install digital wallet application from online store (on Apple or Samsung devices, application is available by default), establish account (typically it is possible to use existing account for iTunes purchases or Google Wallet for example) and link appropriate cards. Although I find it hard to deal with Google Pay on LG G2 device upgraded to Android 5.0.2: application determined that some software on the device has been altered and refused to link a card. But it was a seamless experience with iPhone 6 Plus. When making purchase in store, it is required to launch wallet application (in most cases), choose appropriate card (or use a default one) and then hold device close to the merchant terminal without touching it, until operation is indicated as complete. Finger recognition feature enabled on compatible devices is extremely handy just in case someone else gain access to the device and credit cards stored in digital wallet.

Besides the secure data transfer and obviously no need to carry credit or debit cards, what are other benefits of these systems? I found there are important advantages when you live outside of US for extended time and keep using credit cards issued in US. Lately in multiple cases US citizens were not able to open bank accounts in foreign countries due to the strict international regulations about money laundering, so this opportunity can be vitally important. In this case, actual card is not required for in-store purchases: all you need to know is a card number and expiration date, in order to link it with payment system. By that reason, it is possible to avoid a hassle of sending physical cards overseas. Also there could be multiple points of sale abroad where certain types of US issued credit cards are not accepted. But payment system effectively removes the direct communication between merchant and credit card: support for Apple, Google or Samsung Pay is just a single requirement in this case, regardless of the card being used.

What is a future of mobile payment systems? All these latest and greatest mobile devices with support for NFC payment are quite expensive: many people just can not afford them. Moreover, there are still people without a smartphone. Also, online payments support is currently limited. On my opinion, payments are likely to be made using cheap wearable devices easily available to everyone. They may be even implanted into the human body. No need to send physical card, no need to carry it in real wallet. And potentially it could be a great platform for transition to virtual currency.

How to grow your money when market is down

Everyone know that stock market may be up and down, at different times. It is in a human nature to believe in magic and hope for infinite growth. But there are cycles around 8-10 years each, when bad times keep coming to investors. Is it possible to prepare for that time in advance? And may be, to have a chance to grow money while everyone else is loosing? No way: it is impossible to predict the future. But there is a history of previous events. What is a lucky combination of investments, which performed with minimal loss during recessions in the past? Let us to find it out, with focus on at least two last major market collapses in 2001 and 2009. Past performance does not guarantee the future, but may help to survive for a while.

In order to do that, we need to see how different types of investments performed since year 2000. I found this online tool to be very useful to choose certain combination of investments and compare their performance over the years. There are so many ways to combine different funds or individual stocks/bonds: it may take the entire life to find the right solution. Fortunately, other people already taken care about it. As a result, we have famous portfolios to consider: growth, moderate, conservative, income, Bill Bernstein No Brainer, Bill Schultheis Coffee House, Boggleheads Three Funds, Boggleheads Four Funds, David Swensen Lazy, David Swensen Yale Endowment, FundAdvice Ultimate Buy and Hold, Harry Browne Permanent, Larry Swedroe Simple, Larry Swedroe Minimize FatTails, Mebane Faber Ivy, Rick Ferry Core Four, Scott Burns Couch, Stock/Bonds 60/40, Stock/Bonds 40/60. They all are called lazy portfolios, which mean they do not require much time to manage. Some funds are relatively new and made available after the year 2001 collapse or sometimes even after 2009. In order to have a fair comparison, I decided to replace some funds/ETF with similar funds which has inception data before year 2000: VIPSX with VFITX, TLT with VUSTX, EFV with EWQ (this one was hard to find, as emerging market ETF does not have a long history), VTI with FSTMX and GLD with TGLDX. The results based on key portfolio analysis since year 2000 for initial amount $100K and rebalance bands 5/25% (balance made when some funds are up 5% or down 25%) are in the table below.

In the table, I selected higher final balance, lower standard deviation and lower draw down numbers in green. Opposite numbers are in red. As you can see, higher final balance almost always lead more volatility. For example, income portfolio has excellent standard deviation and minimum draw down, but final balance is the lowest one. However there are a few exceptions. After some considerations, I put together a chart with the following portfolios for detailed analysis: David Swensen Yale Endowment (blue line), Harry Browne Permanent (red line) and Scott Burns Coach (orange line). This graph does not tell much about year 2001 event, but year 2009 obviously affected all funds. Red line (Permanent Portfolio) clearly outperformed others over the time, except recent years when Blue line provide a better balance.

In order to understand the chart, more details about these investments are required. David Swensen Yale Endowment portfolio essentially focus on aggressive stock allocation (both total stock market and REIT market makes 50% of it) with developed and emerging markets making other 20%, and has remaining 30% invested in long and intermediate term treasuries. It explains why it had a deeper drop during the last recession. Harry Browne Permanent portfolio equally distribute money across total stock market, long term treasuries, gold and cash (25% each). Scott Burns Coach portfolio simply divides the entire amount between total market and long term treasuries 50/50. Apparently the large presence of treasuries with conservative yield makes it a money looser in a long run, although does not allow loosing during the recession as much as others. What would you choose among these three portfolios? I found Harry Browne Permanent portfolio the most appealing to investors looking for moderate yield without a significant risk to lose.

I found there were plenty of discussions about Permanent Portfolio in the past, including passionate debates at Boggleheads forums. This portfolio has been initially introduced by Harry Browne and use four basic categories distributed equally: prosperity (supported by stock market), inflation (supported by gold), deflation (supported by long term bonds), and recession (supported by cash). Indeed, having at least one category to strive theoretically prevents portfolio from large loss. Each category does not rely on particular fund on ETF. It rather relies on broader family of investments. For example Vanguard solution would include VTI, VGLT, GLD and VGSH, while Fidelity solution include FSTVX, FLBAXGLD and FSBAX. It is also worth to mention, that Blackrock iShares ETF maintain permanent portfolio just in case someone want a complete solution.

The critics of Harry Browne Permanent portfolio often refer to the low stock market exposure which made it under performer during the great times for stock market, high exposure to gold which price is hard to predict, no international funds (which can be actually a good news right now when emerging markets are under increasing risk), using treasury bonds without a broader bond market exposure. It has been declining in popularity in recent years, however as it may perform better than others when tough times are ahead.

Retirement accounts: designed for losers?

Retirement accounts such as 401K or traditional IRA are quite popular, because they provide a way for working people to effectively reduce tax on a part of their income. Anyone with earned income can accumulate some money in these accounts before tax, subject to annual limit. Then, money can be withdrawn later (in particular after the age of 59.5) in assumption of low tax bracket and less tax due. Sound great, isn’t it? I would argue that while this delayed tax would be definitely lower for many people, the benefit does not seem to be as good as it supposes to be. In fact, some people may not see any benefit at all. Let us discuss it in more details.

Many people continue to work after the age of 59.5 by different reasons. One important reason is a health insurance: popular Medicare program is available to those older than 65 only, and health insurance between 60 and 65 can be really expensive. Some people manage to stop working earlier, because they have a steady income such as investment, for example. In both cases, tax bracket remain high enough to delay retirement distributions. Delay for how long? At the age of 70.5, minimum distribution is required by law. As a result, people must pay tax on their combined income including social security benefit.

How to get the real benefit out of the pretax money? Of course, it is possible just to stop working early and reduce taxes to almost zero. In order to prevent this to happen, penalty is applied to those taking money out of the retirement account before the age of 59.5. There are ways to avoid penalty when some special event happen or by taking periodic payments (SEPP, as already discussed in this article). While special events does not apply to everyone, SEPP has its own issues. The amount of distribution is limited, and once started it cannot be stopped or delayed until the scheduled period is over, eventually leading to higher tax. Fortunately, there is another way to transfer pretax money into after tax account without penalty. Combined with additional planning effort and smart choices, it would be possible to enjoy a true value of retirement money.

In brief, the strategy look like this:

  • transfer 401K money from previous employer’s account into your personal traditional IRA account: no tax paid at this time
  • roll over a part of your money in traditional IRA account into Roth IRA: this is a tax event, so it must be done during the years when overall tax is low or non-existent
  • Roth IRA money will grow tax-free, and will be available to withdraw without any tax or penalty after five years with no required minimum distribution

First, it is important to notice that if someone is working for one employer (or self-employed) for the entire life and has a single 401K then the plan would not work. But in current economic conditions it is quite rare: according to the Bureau of Labor Statistics, in average people change their employer every 4.2 years. So there is plenty of room to implement this strategy.  Otherwise, the rollover of former 401K funds into traditional IRA is available at any time. It is actually worth to consider 401K rollover anyway because traditional IRA typically offer more investment choices and fewer fees than 401K. There may be a conversion fee, but it is typically less when rollover made between accounts of the same brokerage firm. There is no annual IRA fee at Fidelity, for example.

Then, the most interesting question is: when to convert traditional IRA money into Roth IRA, and how much? By the end of calendar year, evaluate your income and estimate how much tax will be due. If income is much lower than usual, then it is a time to take this step. It may happen due to the job loss, health issues, family emergency or many other reasons. According to the recent tax reform, single person is entitled to take $12K ($24K for married couple) as a standard deduction. Also it is possible to deduct up to $10K out of local or property taxes. This would mean, that there will be no federal tax on $22K (or $34K for couple) IRA conversion with no other income source. Still, low tax bracket 12% will be applied for those with annual income up to $38,700 (single filers) or $77,400 (couples).

As regarding Roth IRA money availability, it is important to understand two five-year rules applicable here. The first rule is designed for Roth contributions. As you probably know, anyone can contribute into Roth IRA (subject to annual limit). There is also a limit on earned annual income, but backdoor Roth conversion helps to overcome this challenge. This rule states that any qualified distributions (no penalty and no tax including earnings) can be made in five years after the first contribution is made to Roth IRA, and after Roth IRA owner turns 59.5 (both conditions must be satisfied). The second rule is designed for Roth conversions (which is a subject of this article): five years period is required before money converted from traditional IRA (principal only, no earnings included) can be distributed to owner tax and penalty free. The owner actually has a choice: make distribution or delay it, as there will be no required minimum distribution. More details about Roth IRA rules are available here.

Also it may be a smart choice to make conversions earlier in career, rather than later. According to the recent Census Bureau’s Population Survey, both median and mean income (and associated tax) tend to be lower for those younger than 30, reach a peak around 50 and steadily decline afterwards (please see the plot below). Obviously, making conversions after 55 would be justified too. It is just a matter how much money is still available in pretax accounts and what is a plan to stop working and applying for social security benefit. As previously explained, it may be wise to apply as early as possible. But Roth conversions must be taken into account.

But what if someone did not have much money to convert, when younger than 30? No reason to worry: recession will help. Yes recession can be an extremely good time, especially if it does not last long. Those of us working in corporate world, are painfully aware about these events hitting US market almost every decade. Most people still remember a few recent market downturns, which happened around 1990-1991, 2001 and 2008-2009. While it has been relatively quick recovery after 2001, it was at much slower rate after 2009 and especially after 1991. What does this mean? Assuming that the average person is employed between the age of 25 and 60, there are 3-4 recessions to survive during an active career time. While some of us were lucky to be employed, many people experienced layoffs during the recession years. This is a great chance to enjoy a lower tax rate, if there are money available to live. It is a well-known advise to have savings in after tax money for at least 10-12 months of living to survive this imminent failure of capitalist labor market. I would argue that savings for up to 3 years of living expenses would be a smarter choice.

Of course, it is hard to say if this strategy would work for everybody: it really depends on individual situation. One problem is Roth five-year rule, which makes Roth IRA conversions meaningless for those 55 years old and beyond. Because in less than five years, 401K money would be available penalty free anyway. Anyway, planning well ahead definitely helps to reduce tax and finally deliver more well-deserved money into our pockets.

Rental property: loser or winner?

People are renting out their homes for various reasons. Quite often those who lost a job and steady income stream, would like to replace it with cash coming from renters. In many instances, jobs are lost when economy is in deep downturn and chances to sell a home are very slim. Then, renting out become the only viable option to deal with every day expenses. Pretty much everyone aware of the benefits. You get a stable income, almost independent on market conditions. But most people know a little about the losses, associated with rental property. And I am not even talking about the accidental losses, like repairs or maintenance, or unfortunate event of tenant eviction. It is about imminent loss experienced by landlord. In this article, I would like to discuss rental losses and some solutions how to deal with them in more details.

First, there are good news. There are rental property expenses landlord can deduct from the annual income:

  • mortgage interest
  • property tax
  • repair and maintenance
  • home office
  • insurance
  • association fees
  • utilities (paid by landlord)
  • professional services
  • travel expenses, related to the property management
  • property depreciation

These are pretty generous deductions. In fact, even according to recent tax reform the entire amount of property tax is deductible, opposite to the principal residence where this deduction is limited to $10K annually. But let us discuss property depreciation in more details. It is based on original total cost of rental property less the value of land. While land can not depreciate, building lose 100% of its value over 27.5 years. The deduction begins, when the property is rented to someone, and ends either after 27.5 years in service or when property is not rented anymore (become either principal residence or vacation house). Annual depreciation is calculated as follows:

  • determine the cost basis, i.e. the amount of money initially used to purchase this property
  • figure out from the latest tax assessment, what is a break down into the land and building values
  • determine the basis for building (amount of money originally spent to purchase a building), based on the assessment value and divide it by 27.5

For example, the property has been initially purchased for $785K. According to the latest tax assessment, the building is responsible for $181K out of $906K in total value. Then, the annual depreciation would be: ($785K x  $181K / $906K) / 27.5 = $5,703.

Typically, rental losses can be deducted from the passive income, such as a rental income itself. But what if there is other income? For those earning less than $100K annually, $25K of passive losses still can be deducted to offset income from other sources. Overall, there are plenty of deductions available for landlord. If we assume that some individual over the age 50 has annual income $48K (which falls into 22% federal tax bracket according to the latest tax reform) would like to rent out a property with mortgage already paid off and property tax $14K, then the following deductions and rental property expenses are available:

  • $12K federal standard deduction
  • $14K rental property tax
  • $5,703 rental property depreciation
  • $6500 traditional IRA contribution
  • $4450 HSA contribution

Then, the taxable income would be as low as $5K and this is even without taking into account state tax and other smaller scale deductions available. As a result, the tax would be around $500 (or less, after the deduction of state tax, insurance, HOA and repair expenses). This is a great example, how combined deductions and rental expenses can eat up the entire income tax. Meantime, individual would still have $23K in positive cash flow after property tax and pretax contributions.

So far, so good. But is there a negative side of this story? Sure it is. The rental property depreciation effectively reduces the cost basis for the property, which leads to depreciation recapture tax. It is important, when you decide to sell the rental property, you lived in the property for the last 2 out of 5 years and there is a capital gain more than $250K for individual (or $500K for couple) which can be excluded from the income. For a gain over these numbers, long term capital gain tax must be paid. Rental property depreciation makes the amount of gain and associated income tax higher. Moreover, it is considered as a subject to ordinary income tax which is higher than long term capital gain tax. Home value appreciation over the last decade made this situation real in many metro areas, such as NYC, San Francisco Bay, Seattle. For the above example, additional tax for income $28,515 will be applied if property has been rented for 5 years. Essentially, the depreciation tax must be paid back to federal government. Is it possible not to claim rental property depreciation? Yes it is possible, but the pay back would be still required, even when depreciation has not been claimed.

Is there a way to avoid a depreciation recapture tax? Yes: home improvements can offset property depreciation and take building cost basis back, where it was before the rent. Which home improvements can be claimed against cost basis? Pretty much everything. Most popular are:

  • bathroom or kitchen remodeling
  • windows and doors replacement
  • hardwood or laminate floor
  • new furnace or heater
  • roof replacement
  • garage door replacement

Typically, over the long time there will be improvements anyone must have. Each improvement would increase the cost basis and reduces capital gain tax for the sale of the property. The roof replacement alone may offset the decade of property rent. However please keep in mind, these are real expenses. But it does not really matter, if you do it anyway. Home improvements can be done at any time, but before the property is sold. It is also advised to sell the property during a fiscal year, when income from other sources is low in order to reduce the total tax. Again, all these matters for properties with substantial gain in their values in selective metro areas. Otherwise, the owner typically does not pay any tax on the capital gain and home improvement expenses would be entirely after tax money.

Social security: pay for being late?

When to apply for social security benefits? Many people are interested to learn. It is well known, that anyone with earned income during at least 10 years can apply for this well deserved help from the federal government at the age of 62 or later. Late application is always welcome: the amount is growing with applicant’s age, with maximum reached by the time applicant turns 70 years old. This is the way how government encourage us to apply later, rather than earlier.

In 2016, I wrote an article with some calculations how both retirement age and application age affect the benefit. For example, someone with 18 years of professional career behind may be looking for $1,500 when applied at 62 or $2,700 when applied at 70. Let us use this example to determine, if indeed it is better to delay application as much as possible or not? The graph below is created in assumption that applicant stopped working before 62. It reports the total amount of benefit collected over the retirement time using the above example, defined by the application age and end-of-life age.

From the picture, we can clearly see that the total amount depends on the end of life age. It may be hard to predict, but for an average person 80 to 85 years would be a reasonable bet. But an important observation is that actually the total amount show a little difference with application age for those passed away at 80. And even for those lived till 85, applying at 66 rather than 70 seems a pretty good choice because the amount does not change much later. Obviously early application helps greatly to those passed away at 70 or 75. You can substitute your benefit numbers, but the trend will look roughly the same: delaying application may not bring as much money, as anticipated.

There is yet another aspect for this analysis. Those applied early for the benefit, may be able to invest and grow money saved due to the social security income. For example, $18K (which is equivalent to the benefit of $1,500 per month) invested with 4% return would yield $5,760 over 8 years. But even more important consideration is an income tax. Please do not forget, that social security benefit is a taxable income. However, as of now we have to make at least $25K per year as an individual (or $32K with joint return) in order to be liable for federal tax. Some states also tax social security: Colorado, Connecticut, New Mexico, Rhode Island, Kansas are among them. It may be well justified to apply early for social security to avoid the tax, by limiting retirement income to around $2K per month.

Finally, let’s not forget about 401K and other accounts where pretax money are collected. They designed to fund our golden retirement years, but may carry a significant tax burden. There is a great article written by Curry Cracker: is your 401K too big? Indeed, collecting large amount would eventually lead to higher tax and effectively reduced social security benefit. But what number is reasonable? It depends. Thanks to the recent tax reform, one can claim as much as $22K per year which includes $12K in standard deduction combined with $10K state and local income tax cap through 2025. It means, that converting up to $22K each year from 401K to Roth IRA would not trigger any federal tax (assuming there is no other taxable income). Based on this magic number and the age when conversion starts, it is easy to estimate if your 401K is too big or not.

Let us assume, that 50 years old person is considering to quit a job and make annual 401K conversions into Roth IRA to ensure the entire amount is converted into after tax money before applying for social security benefit. In this case, no federal tax paid either on 401K distributions, or social security income. As demonstrated by the graph, he or she is out of luck if total pretax assets are greater than $300K: even $22K distribution would lead to the delay in applying for social security benefit. Smaller distributions would further delay it, even beyond 70 in some cases. What is a solution? Save more after tax money over a shorter time and reduce a tax bracket as early as possible. Those of us, who does not have enough money to live and must remain in high tax bracket till 60, 65 or later should expect higher tax and reduction in social security benefit.

Therefore, decision when to apply for social security benefit is not that simple. Delay in application may sound right at the first, but in fact depends on multiple factors such as life expectation, the age when conversion starts, tax bracket and assets in pretax and after tax accounts.

Money from 401K: no penalty, any time!

Retirement account is a great way to hide your money from Uncle Sam. It is especially nice for those in higher tax brackets. But it is also well known, that in most cases we have to wait till the age of 59.5 to avoid a penalty on retirement funds distribution. There are a few exceptions, but these are special life events and definitely not for everyone. However there is a better way to avoid a penalty suitable pretty much for every person and most people do not know about it. We will focus on it in this article.

First of all, we can briefly go over the main types of retirement accounts: 401K (offered by employer) and traditional IRA is at one side, while Roth 401K (offered by employer) and Roth IRA are at other side. Both 401K and traditional IRA provides an opportunity to invest pre-tax money, while after-tax money are accumulated within Roth 401K or Roth IRA. All four types of accounts allows growing money tax free. But distributions from 401K and traditional IRA are considered as ordinary income and tax must be paid. Distributions from Roth accounts are tax free, but with restrictions. There are also annual contribution limits for all retirement accounts. For more details about each account type, please see the table below. Some extra opportunities exist, for example after tax contributions still can be made into traditional IRA. Other account types like solo 401K, 403B, SEP IRA, simple IRA, health savings accounts are outside of our discussion for now.

All these accounts are designed to fund our retirement years. It is permitted to withdraw money from 401K or traditional IRA penalty free (but not tax free) and from Roth 401K or Roth IRA penalty and tax free at the age of 59.5 or later (often referred as qualified distributions). It works for most people. Why would anyone want to take distributions before that age? There could be some reasons of doing that:

  • running out of money because of the job loss or other unfortunate event
  • return on after tax money investment outperform retirement account earnings
  • in anticipation of tax increase on future pre-tax money distributions

Actually there are legal options to take early distributions from retirement accounts without penalty:

  • owner become disabled or passed away
  • funeral expenses
  • some 401K plans allow penalty free withdrawal, after employee’s voluntary or involuntary job termination at the age of 55 or older (at the age of 50 for certain public services)
  • medical expenses not paid by insurance for owner, spouse or dependents
  • purchase of the principal residence and certain expenses to repair damage for principal residence
  • payment of college tuition and related educational expenses
  • payments necessary to prevent eviction of the owner from principal residence or mortgage foreclosure
  • result of qualified domestic relations order (QDRO)
  • substantially equal periodic payments (SEPP, rule 72(t))

In fact, almost all options are related to hardship or special life changing situations. Except for the last one, which is our primary focus now. The good news is, pretty much anyone can take money from retirement account following certain rules and pay no penalty. Tax is still imposed on all distributions, including Roth accounts. Therefore, this option does not make much sense for early withdrawal from Roth 401K or Roth IRA because these are already after tax money. But it can work very well for 401K or traditional IRA with one catch: it must be 401K from the former employer. Three methods are available:

  • required minimum distribution method based on life expectancy of the owner, using IRS tables for required minimum distribution
  • fixed amortization method over the life expectancy of the owner
  • fixed annuity method, using an annuity factor from a reasonable mortality table provided by IRS

Basically, the funds are placed into SEPP plan which pays annual distributions for five years or until the owner reach 59.5 age (whichever comes later). The plan can be terminated by the account owner, but with severe outcome: all avoided penalties must be repaid to IRS combined with interest. It is important, that the amount of annual distributions meet one of three IRS approved methods described above. The largest and most reasonable amount is offered by amortization method, when annual payments are fixed. More details are available on 72(t) website. In order to execute the plan, an individual need to make the following steps:

  • calculate the amount using IRS tables
  • withdraw money annually for five years or until he or she reaches 59.5 age
  • correctly report distributions in tax return every year

How much money is permitted to withdraw each year from retirement account penalty free before reaching the age of 59.5? There are some examples provided by IRS here. Bob, age 50 is the owner of IRA with account balance $400K and has his interest estimated as 2.98% (120% of the applicable federal mid-term rate). He would be able to withdraw $12,261 using required minimum distribution method, $18,811 under fixed amortization method and $18,740 under fixed annuity method annually. Obviously, the amount would be higher with a greater balance on retirement account.

With careful planning, early SEPP distributions from 401K can be combined with tax reduction strategy I outlined before: distributions equal to the tax deductions would eliminate federal tax completely. It is not possible to deduct the entire property tax anymore, but up to $10K local and state tax deduction combined with standard $12K deduction are still available. According to the 2018 tax reform, single person can have up to $22K deducted from the income which is a reasonable amount to live a simple life at most places across United States.

Living without a car: myth or reality?

United States are built around the cars. In fact, the car is about a personal freedom: you do not have to depend on anyone to get to the place you want. There is a great system of highways and freeways in place for making our trips as comfortable as possible. It is not terribly expensive to buy and maintain the car. Different models are available on the market, designed to fit any wallet. But it is still an expense. For example, I normally spend around $3K per year for inexpensive car service and fuel, combined with insurance. It may easy increase up to $6K for the years, when major regular service is required. You may want to add insurance deductible, when accident happens. Also, there are too many cars on our roads. They all are contributing into the traffic and pollution, especially in densely populated metropolitan areas. Is it possible to live in United States without a car? Let us find out.

You definitely do not want to live without a car in a remote rural area. It is plainly impossible to do anything, when there is no public transportation available nearby. Therefore, in this article I would like to focus on metro areas. But do we have to limit our choice to NYC, Washington DC, Chicago, Boston, San Francisco and similar noisy crowded cities with homeless people, drugs and criminal activities spread around? This is the question I asked myself in the past, visiting different cities across the countries. I believe, some of them would make a nice option for living without a car.

But let us discuss places where it is actually better not to have a car. The first and obvious choice would be New York City. It has a terrible traffic and an excellent subway system. In addition to that, there are countless bus routes and some ferries (worth to mention a free ferry to and from Staten Island). And of course Grand Central Terminal, where people take a train to suburbs or other cities. There is a great choice of different neighborhoods across the City, completely covered by public transportation. But the cost of living in NYC is generally very high, partially due to the high taxes. Some lower cost areas comfortable for living can be still found, Brooklyn for example. It is also worth to mention, that subway has a direct connection to free AirTrain taking riders to the largest nations’s airport JFK. As regarding suburbs, situation may vary: you have to stay close to railroad station or town center in order to live without a car. And there may be still a need for a car to reach some important place like a doctor’s office, even if you do not have to commute to work every day.

Another city with a great public transportation options is Washington DC. The system of bus and rail service is available almost everywhere in the City and even suburbs as far as Virginia or Maryland. Also, there are excellent train connections to Baltimore, NYC and other cities. Washington Metro rail service looks cleaner and nicer than purely functional subway in NYC. There is a direct connection to Reagan airport with green and yellow lines, however larger Dulles airport can be reached by slower bus service only. It is easy to live without a car within the city limits, as well as near-by suburbs like my favorite Alexandria or Arlington. All areas west and north of Capitol are considered safe and some of them are reasonably priced. But it would be still a good idea to have a car, if you live outside of the area covered by rail or bus service.

Chicago and Boston are other cities with carefully developed transportation system. Although they do not have a system as large as NYC or Washington DC, the entire downtown area and even certain suburbs are within the reach by either a train or a bus. In fact, the great advantage of Chicago’s rail system is a direct connection to O’Hare International Airport: the train would deliver you right into the terminal, like in Europe. Over the decades, Chicago was well known as the criminal center of the world. But situation improved dramatically: downtown area is much safer and comfortable to live now, with a great choice of good looking high rise condos, shopping options and all that for very reasonable price. Boston’s MBTA is also an excellent example of subway, buses, commuter rail and ferry routes delivering people almost everywhere within the City. There is a subway connection to Logan airport using free shuttle bus. But cost of living in Boston is higher, compared to Chicago or Washington DC.

Other cities, although quite populated, definitely can not compete with NYC, Washington DC, Chicago or Boston in public transportation options and coverage. There are people, living without a car in San Francisco. BART service (which can be considered as a sort of subway system) although running through downtown and financial district to SFO and East Bay communities, is available to the small part of the City. Other parts of San Francisco are served relatively well by light rail and bus Muni system, but it can be slow to deliver you from Embarcadero Bay waterfront to Ocean Beach for example. Even fewer options are available to the residents of Oakland or San Jose. In fact, most of South Bay communities are well covered by VTA bus routes. But the bus service in this area is really slow and inefficient. You need to live closer to the light rail station to leave your car at home, but light rail is available in selected areas only. It also takes an extremely long time to ride VTA light rail from Blossom Hill to Mountain View, for example. Still, many people use BARTVTA and Caltrain for commute to work or leisure activities.

Among smaller cities, it is worth to mention Portland and San Diego. There is no subway, and it may not be required as the scale of city limits is not as huge as NYC. However, both are covered very well with light rail and bus service. It is definitely possible to live in Portland downtown area with a car because of excellent TriMet system. Also, I would argue it is possible to live without a car in some smaller cities outside of Portland such as Hillsboro, Beaverton or any other towns accessible through the MAX service. Portland international airport is also directly connected to MAX. Plenty of private offices or government services, as well as Oregon State University and associated hospital are located in downtown area, where anyone can easy walk from bus or light rail station to pretty much anywhere. San Diego’s MTS is another, may be even smaller scale example of well designed system for medium size metro area. There are three trolley (light rail) lines and countless bus routes, basically covering the entire downtown and some suburbs. It is possible to take a trolley to downtown area, San Diego State University, San Diego Airport (connected through shuttle) or even Mexican border. But like in Portland or San Jose, you are out of luck if you live in the area served by bus service only as it can be slow and inefficient.

There are two other cities worth to mention, as they seem to have a really good public transportation: Minneapolis and Salk Lake City. Like in Portland or San Diego, there is no subway system but light rail and bus services are quite efficient and can take people to different places, mostly within the city limits. The rare availability of public transportation is combined with very reasonable cost of living at both places, which make them standing unique against others discussed above. Unfortunately, I have never been at these places and did not draw my own opinion, but according to others both cities are friendly to hikers and bikers. I also wanted to warn, that there are many other large size metro areas like Houston, TX or Phoenix, AZ for example, where you need a car even if you live in downtown. This is because public transportation options are really limited in these cities.

The bottom line is that there are places in United States, where you can live without a car. But these places are typically limited by large or medium size metro areas in certain states, and very likely you end up with a higher cost of living, combined with criminal and drug activities. This is a reality, we are facing. But there is a clear trend to make more places comfortable for walking and enjoying life without a car. In fact, there are some smart living neighborhoods or even cities which already provide this option. Santa Clara’s Rivermark Village is one great example, and The City of Bee Cave is another example which is my favorite little town around Austin, TX. At both places, you can easy walk, enjoy great parks and shopping without ever using a car.

Laid off? Plan, rather than panic!

It is nice to be employed. Employment comes with various benefits, money is the most essential one. But in United States, employment can be terminated at any time for business reasons. It is hard to accept, that someone is in power to decide your future. But this is the way, how business position itself against the failure. In this unfortunate event, some people start to panic, as they anticipate the loss of benefits and potential loss of money. In order to avoid terrible mistakes in a panic mode, it is always good to have a plan. The plan, which include the reasonable steps in case of layoff from the rational rather than emotional side. Based on the recent personal experience with a large scale layoff, in this article I wanted to share some information important to approach this event with the courage, not a fear.

As I already mentioned, layoff may happen at any time while we are employed. By that reason, it is always nice to be prepared. First, make sure HR records with home address are up-to-date: at least one FedEx package will be sent in the event of termination. In fact, it is always recommended signing up for FedEx delivery notifications: in this way, it is possible to learn about the layoff event one day before it actually happens: in most cases, FedEx overnight delivery service will be used. Second, it is a good practice to download each paycheck and store it on your personal computer’s disk: paychecks will not be available anymore in the event of layoff, however total compensation over the last two years is required to calculate the annual income correctly, when filing for unemployment benefits.

There are also a few other steps, which may be useful in some situations before the actual layoff happens. It might be beneficial to obtain employment verification letter in anticipation of certain events such as credit application, etc. Many companies use Theworknumber for verification services: it makes sense to figure out a company’s code, if current employer has records with this provider. As regarding the background check performed by potential employer, most of them are using a third party provider (such as Accuratebackground for example) for a new hire background check. Also it is important to make sure that the contribution maximum for 401K plan is reached early for a calendar year, since there may be no contributions for the rest of the year in the event of employment termination. Finally, it is always recommended verifying what will happen with healthcare spending accounts, and act accordingly to prevent the loss of these savings.

It is also beneficial to get familiar with WARN act, as it may have a direct impact in some situations. The Worker Adjustment and Retraining Notification (WARN) act is a law, which require most employers with 100 or more employees to provide an advance 60 days notice of employment termination. In this case, in the event of termination all affected employees remain on the company’s payroll for 60 days with all benefits included. The rules of WARN act application are complicated. Typically, it may be in effect when more than 500 positions are eliminated in a short time at certain location.

With respect to health insurance, employees affected by layoff has an option to purchase COBRA (Consolidated Omnibus Budget Reconciliation Act), as company’s insurance ends with the termination notice. COBRA has coverage, identical to employer’s insurance. Employer is typically responsible for its part of COBRA for 30 days after termination. Beyond that, former employee is in charge for the entire cost. Therefore, it is recommended to figure out the total cost of health insurance provided by employer and explore other options, if they are available. Affected employees has 60 days period after the termination notice to purchase COBRA. It can be done at any time, since COBRA coverage is retroactive. It means, that all events before the purchase will be covered. In total, COBRA coverage can be extended up to 18 months and may be terminated at any time.

401K plan provided by employer can remain in place, if the total contribution amount exceed $1000. Also there is an option to roll it over to Roth IRA or 401K with another employer, if hired for a new job. It makes sense to leave 401K with former employer, if the plan has better benefits and the choice of options than the one provided by current employer. Roll over into Roth IRA will have a tax implication and need to be approached with caution. Besides that, 401K funds can be distributed into taxable account, but penalty will be assessed in addition to the tax if the owner is younger than 59.5 years old.

At the termination date, most companies provide a severance package. This is a lumped sum, paid to affected employees based on their compensation and a tenure with company. The rules are quite different across the industry. Typical package for example may include 4 weeks pay for the first year of service, and then 1 week for each other year up to 26 weeks. The years of service could be reduced with WARN act, by 60 days when affected employees are still on a payroll. It also should include payment for any unused vacation time. In order to receive the package, affected employee must sign a release agreement mailed using FedEx the day before the termination date. Payoffs are processed when the release agreement received, and paid through the direct deposit or check in mail.

Right after the termination notice, employees affected by layoff may be eligible for unemployment benefits. In some states, there are specific rules which require waiting for certain period before applying for unemployment benefits due to the funds received with severance package. Fortunately, this is not a case in California. The unemployment compensation is paid weekly and currently it is $450 per week. In order to receive the benefit, application is required. During the application, be prepared to provide certain information such as the name, social security number, home address along with the phone number, driver’s license number, list of all previous employers with the dates, wages over the last 18 months, work authorization status and ability to work. Please make sure to mention “layoff” as the reason of not working anymore. In California, please use the link for more detailed information. There are also instructions on youtube, how to file an application for unemployment benefits.

Finally, as few words about stock options. All stock not vested by the termination event will be eliminated immediately. Any vested RSUs (Restricted Stock Unit) are distributed and considered as employee’s personal stock, which can be sold at any time. Typically, there is a few months period after the notice to exercise any vested NQS (Non-qualified Stock). As regarding ESPP (Employee Stock Purchase Plan), the ongoing contribution ends at the termination date and refunded without the interest.

It is important to be aware about all details described above, in order to prevent any loss of benefits offered by the former employer or the state and streamline the process. The next step would be the job hunting, but it deserves a separate article. I wish a good luck to anyone, involved into the unpleasant and stressful experience of being terminated at your job.