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Starting a new job can be a stressful time. On top of trying to learn a new role and make new connections with colleagues, there are a number of financial considerations and new benefits to consider.
Below are some financial areas to focus on and opportunities you may have as you start a new job.
1. 401(k): Roth or Traditional
Many employers now offer the choice to make traditional pre-tax 401(k) contributions or after tax Roth 401(k) contributions. Although the total contribution limits remain the same, you can usually split contributions between the two options however you’d like.
When you think about how to allocate your savings between the two, the primary consideration should be your current and future tax rates. If you expect to be in a lower tax bracket when you retire and withdraw the funds, taking the benefit of the tax deduction with a traditional 401(k) is your best bet.
If you’re unsure about your future tax rate (as most of us are), you can split contributions between the two options. Or better yet, if your income is variable, you can make Roth contributions in lower income years when your tax rate is lower and traditional 401(k) contributions in your higher income years.
When deciding how much to contribute, make sure you understand if your employer offers a matching contribution. Be sure to contribute enough to at least earn the match. And also don’t forget to think about what to do with your old 401(k).
2. Disability Insurance
Disability insurance can be a huge benefit provided by employers. It allows you to leave your emergency fund and long term investments untouched if you were unable to work for a period of time.
You may have the option to pay the premium yourself versus having your employer cover the cost of the insurance. It may seem like an additional benefit to have your employer pay, but if you pay the premiums instead, any benefit you receive will be tax free.
3. Health Savings Accounts
If you choose a high deductible health plan, make sure you take advantage of an HSA. Some employers may even contribute to an HSA on your behalf.
There are three different tax benefits to using a health savings account:
- Contributions are tax deductible.
- Earnings on investments within the account are tax deferred.
- Withdrawals of contributions and earnings from the account are tax free if used for qualified medical expenses.
And if you’re able to pay medical expenses out of your current cash flow and invest the funds in your HSA for the long term, you can really get the full benefit of these tax advantages.
4. Flexible Spending Accounts
If your employer offers an FSA, this could be a great way to reduce your tax bill. Contributions to these accounts are typically made on a pre-tax basis, meaning they reduce your taxable income.
Healthcare FSAs can be used if you do not have an HSA. But beware that unlike HSAs, the funds typically need to be used by the end of the plan year.
Dependent care FSAs can also be a great way to save on taxes if you have young children. To take advantage of these accounts, both parents need to have earned income, and you must have childcare expenses for children 12 and under. You also need to weigh the benefits of the FSA option against taking the child and dependent care credit – you can’t use the same expenses to qualify for both.
5. Tax Withholding
Starting a new job is a great time to evaluate your withholdings, especially if you’ve had a big refund or tax bill in the past.
The IRS updated Form W-4 in 2020, so it may look different from the last one you’ve filled out. Fill out the form as accurately as possible based on the instructions. And be sure to revisit this form if you have any major life changes like having a child or getting married.
If you work with a CPA or financial planner, ask if they can run a tax projection for you to see if your withholdings are on track. This is the most accurate way to determine if you should have additional money withheld from each paycheck.
6. Group Life Insurance
Many employers pay the premiums for some amount of life insurance for their employees. But this is typically for a death benefit of only one or two times your salary. And depending on your circumstances, you may need much more insurance than this.
For most people, buying an individual term life insurance policy is cheaper than purchasing additional coverage through your employer. However, if you or your spouse has a health condition that makes it difficult to qualify for an individual policy, the group policy through your employer may make sense.
7. Equity Compensation
If you’re receiving equity compensation from your new employer, first get a good understanding of the plan and the type of equity you are receiving. The tax implications of receiving RSUs versus stock options for example can vary greatly.
If you expect to have a high income year due to vesting or exercise of some awards, plan ahead and think about whether estimated tax payments may be necessary. This can help to avoid underpayment penalties come tax time.
Once you own shares in the company you work for, you want to make sure you don’t have too much of your net worth invested in your employer’s stock. Having your financial capital and human capital tied up in the same company can be a risky proposition. Typically, you should try to avoid having more than 5-10% of your assets invested in any one stock.
Changing jobs can come with some challenges. But it also presents an opportunity to make sure you are maximizing your benefits in a way that is aligned with your personal goals.
About the Author
Joe Calvetti is a CPA and the founder of Still River Financial Planning, a fee-only financial planning firm providing comprehensive financial planning to young families and professionals.
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