This article was originally published by Lorri DeFoor at Sustain Financial.
In a work environment where the average person will change jobs twelve times over the course of their career, financial planning considerations and opportunities related to job changes can’t be ignored as an important component of one’s short and long-term financial plan.
While there are many opportunities for financial planning in job-searching and the decision to leave one’s previous employer, this post specifically focuses on important financial planning decisions that need to be made immediately after starting work with a new employer.
W4 Withholding
If you’re changing jobs mid-year, by far one of the most overlooked considerations is whether your W4 withholding elections are setting you up for a big tax bill next April.
How can this happen if your personal or family situation hasn’t changed? Let’s look at an example:
If a single employee with no children makes $55,000 at a job over the course of the first six months of the year, they’ve used up their room in the lower 10% and 12% tax brackets and their income should now be taxed at the 22% rate. If they stay at their current job, this will all be taken care of behind the scenes as long as their W4 correctly represents their tax situation.
But if they leave that job after making $55,000 and start another job, which, for the remainder of the year will pay them another $60,000, unless they specify additional withholding on their W4, the new job will consider the $60,000 of income that they make to be their first $60,000 of income, and therefore the withholding will mostly be done at the 10-12% level.
Come April, when they file their taxes, they’ll report $115,000 in gross income, over half of which will be taxed at about 22%, but only 10-12% will have been withheld from their paycheck. They’ll potentially be looking at a $6000 tax bill. This problem can be compounded with higher income earners or more complex family situations.
The solution: in step 2(b) on the W4, use the multiple jobs worksheet to help calculate the correct withholding for your new job, then enter the amount of additional withholding you want in Section 4(c). After December 31, go back and submit a new W4 without the additional withholding request. Alternatively, you could use estimated tax payments for the remainder of the year to pre-pay the IRS the difference on the percentage being withheld and the percentage that should be withheld. If you go the route of making estimated payments, no W4 change will be needed after December 31.
You can double check your withholding using the IRS tax withholding estimator after you’ve received your first paycheck from your new employer to see if you are withholding the correct amount.
There’s not necessarily a “right way” to do this, but the goal is that you are not completely caught off guard by a much larger tax bill than normal due to incorrect withholding.
Life Insurance Decisions
For many folks who are of average or better than average health, it’s not essential to rely on a workplace plan for life insurance, as it can often be more affordable to purchase that insurance privately.
However, for people with chronic health conditions or a history of cancer, it can be completely cost-prohibitive to purchase a life-insurance plan on the private market.
The solution: Many group policies offered through employers have a short (sometimes as short as 30 days) window of time where you (and possibly your spouse or domestic partner) will be eligible to purchase a certain amount of additional life insurance without going through any type of health screening or questionnaire.
Once that window has passed, this opportunity will not come up again, even during open enrollment. So, it’s important, particularly for someone whose health would make it otherwise prohibitive to purchase life insurance, to take advantage of this window of opportunity.
This is one of the most overlooked opportunities that job-changers have, and it can be a critical way of providing income protection if you or your significant other has an uninsurable (or cost prohibitively insurable) health condition.
Health Insurance Deductibles
Starting a new health insurance plan mid-year can often mean a reset in your health insurance deductible. Particularly if you are a person utilizing a high deductible plan, this may cost you several thousand dollars if you are not aware of it.
The solution: For high deductible health plan users, consider if it makes sense to temporarily switch to a lower deductible health plan at your new employer to finish out the year. If you do opt to move to another high deductible health plan, try to prioritize not over-utilizing the plan until the calendar year (or whatever 12-month period your new insurance uses) resets the deductible.
If you’re a qualified high deductible plan user and you switch to a lower deductible plan temporarily so you don’t end up double paying that high deductible, just keep in mind that your Heath Savings Account (HSA) contributions will be limited to whatever portion of the year you were covered by the high deductible plan. So, for example, if you were on the high deductible plan from January through August, you would be eligible to contribute 8/12 of the maximum contribution to your HSA for the year.
Understand How the Retirement Plan Works (and what decisions need to be made now)
The type of retirement plan available at your new job makes a lot of difference in determining whether there are decisions that need to be made immediately. For example, if you’re moving into a government or civil service position, you may need to make a decision within the first 30 to 90 days about the pension system and retirement contributions, and the decision you make may be irreversible for as long as you work for this employer.
On the other hand, private industry 401(k)s or SIMPLE IRAs have more flexible rules, allowing you to change contribution and investment elections whenever you’d like, or at least once per year. And some of these plans won’t even allow you to enroll or sign up until a certain amount of time has passed.
These situations vary so widely that it’s impossible to give a universally relevant suggestion here. Suffice it to say, it’s important to pay attention to which retirement plan decisions need to be made within a certain number of days of hire, and which ones, if any, are locked in for the entirety of your employment. With all the other items going on related to learning a new job, this can sometimes fall to a back burner. But it’s extremely important to understand how your retirement plan works and whether your plan has decisions that need to be made upon hire that you will be forced to live with for the remainder of your tenure at the new organization.
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