So you got that exciting new job you interviewed for — congratulations! When you start, you will be focused on impressing your new boss, diving into a fresh set of responsibilities, and gaining the respect of co-workers you’ve just met. But in the midst of settling in to your new job, it's important to consider the many ways your new position will impact your financial situation.
When you change jobs, you not only alter the work you do and the people you do it with. It’s also a major financial transition. Here are six steps that personal finance experts say will help you make the most of the switch:
1. Revisit your budget.
A change in salary may require adjustments to your budget. If you are getting paid more, consider whether you should increase the dollars you set aside each month for debt repayment (mortgage, student loans, credit cards, etc.), retirement plan contributions, a major planned purchase (like a car, home or vacation) or an emergency savings fund.
In addition, make sure you budget for any interim period between the end of your current job and the first pay date for your new job. Do you have emergency funds in place to offset any income gap the job change is creating?
2. Determine what to do with your old retirement plan.
You have four choices: leave the assets in place, roll them over to an IRA, roll them over to your new employer’s plan, or cash out. It’s important to weigh the pros and cons of these options and choose the one that makes the most sense for your situation. Before you choose, know your 401(k) rules, compare fees and expenses, and consider any potential tax implications. A few things to consider:
- Consolidating your previous employer’s plan either into your new company plan or with your independent advisor often will make your retirement funds easier to manage.
- Leaving funds in your previous employer’s retirement plan can be a mistake, because you probably won’t monitor those investment dollars as closely as you should.
- Taking a cash distribution from the old plan could be problematic if you're under the age of 59½, because in that case the IRS is required to tax the distribution as income and levy a 10% early withdrawal penalty.
3. Make decisions about your new retirement plan.
Set up your contributions to your new employer-sponsored plan as soon as you are eligible. Experts advise that you contribute at least enough to your plan to maximize the employer match. You will also need to decide which single fund or mix of funds you should invest in. Your financial advisor can make suggestions based on your risk tolerance and other retirement-portfolio investments.
4. Manage the health insurance transition.
Some recommended steps include: discussing dates with your old and new employers to assure continuous coverage; checking on the status of any pending claims under your old coverage; and arranging any needed transfers of records from your old insurer to your new insurer.1
5. Evaluate other benefit elections.
You might also have life insurance, disability insurance, a flexible savings account or a health savings account available to you. Additionally, there may be other perks offered by your new employer that you can sign up for, including commuter assistance, tuition reimbursement for continuing education, and student loan assistance.
6. Re-assess your tax situation.
If your new salary represents a change, you will want to review your W4 tax withholdings. The number of allowances you claim affects how much tax your employer withholds from each paycheck. Make any necessary adjustments to ensure you are not withholding too little or too much federal income taxes.
Other parts of your compensation package could also have tax implications. For instance, some types of stock options receive preferential treatment. Also, if your income is increasing, will you lose tax deductions and credits you’re currently eligible for?2 Be sure to review your new package with your accountant or tax advisor.
The first days and weeks of a new job are exciting, but they can also be a little stressful. Taking the time to carefully think through your new financial situation will help position you for long-term financial success.
1 “Job changer’s financial checklist,” Merrill Edge. https://www.merrilledge.com/article/job-changers-financial-checklist
2“3 Financial Mistakes to Avoid When Changing Careers,” https://www.themuse.com/advice/3-financial-mistakes-to-avoid-when-changing-careers
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