A new job brings a lot of changes, and it's often a little overwhelming in the beginning as you're settling into a new work environment and trying to understand what's expected of you. You'll have to make a number of decisions, not only about your job, but also about your finances. You can always change your mind later, but it's easier to get it right the first time. Here are five of the most important money decisions you'll have to make.
1. Your tax withholding
Your tax withholding allowances tell your employer how much of each paycheck it should withhold for taxes. The more allowances you claim, the less money is withheld from your taxes. But that doesn't change what you owe at the end of the year. Claim too many allowances and you could end up owing the government instead of getting a tax refund. Claim too few and you'll have to wait until you get your tax refund to use the money that should've been yours months ago.
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The correct number of withholding allowances varies depending on your marital status and the number of dependents you have, among other things. You can figure out how many allowances you should be claiming by using the IRS's Tax Withholding Estimator tool. You enter this information on the W-4 form that your new employer gives you, and you can change it at any time by filling out a new W-4.
2. How much you should contribute to your retirement
There's no magic number or percentage of your income you should be saving for retirement. Hopefully, you've already created a personalized retirement plan to help you estimate what you should be saving each month. If not, a retirement calculator can do a lot of the hard work for you, but you'll need to know how much you currently have in retirement savings, when you'd like to retire, how long you think you'll live, and how much you expect your annual expenses to be in retirement. Use a 5% or 6% annual rate of return on your investments to be conservative and a 3% annual inflation rate.
Your calculator should tell you how much to save overall and per month to reach your goal. Subtract anything you expect from a pension, 401(k) match, or Social Security. You can estimate your Social Security benefit by creating a my Social Security account. The remainder is what you have to save on your own.
If you can afford to save this much and your employer offers a 401(k), set up automatic withdrawals from each paycheck so you don't have to remember to transfer the funds on your own. If you can't afford to save as much as your retirement calculator recommends right now, try making some changes to your budget, like limiting your discretionary purchases, to free up more cash. When you get a raise, increase your retirement contributions before you do anything else. Stay mindful of the contribution limits. You may only contribute up to $19,500 in 2020 to a 401(k) or $26,000 if you're 50 or older.
3. How you'll save for retirement if you don't have access to a 401(k)
Some employers don't give new employees access to the company 401(k) right away, and some don't offer a 401(k) at all. But you still have to find a way to set aside money for your future. Most people fall back on an IRA if they don't have access to a 401(k). You can set this up with any brokerage firm, and contribute to it as long as you're earning some income this year. You're allowed to contribute up to $6,000 to an IRA in 2020 or $7,000 if you're 50 or older.
There are two types of IRAs: traditional and Roth. Traditional IRAs are tax-deferred, which means your contributions reduce your taxable income this year, but then you must pay taxes on your distributions in retirement. This type of account is best if you think you're in a higher tax bracket today than you'll be in when you retire. Roth IRA contributions don't reduce your taxable income this year, but your contributions grow tax-free afterward. This makes a Roth IRA a better fit if you think the tax bracket you're in now is the same as (or lower than) the one you'll be in when you retire. You can also have one of each type of account, but note that the above limits apply to all of your IRAs, not each individually.
4. What to do with your old 401(k)
You can do one of three things with your old 401(k). You can leave it where it is, but this typically isn't the best idea because then you end up with more retirement accounts to juggle. Your old account's value will also get slowly eroded by fees, and you won't be able to contribute any more to it. Another option is to roll it over into your new 401(k), if your new employer offers one and permits rollovers. You could also roll over your old 401(k) into an IRA you set up on your own.
Rolling the account over means you'll have fewer accounts to manage, and putting the money into an IRA gives you greater freedom in how you want to invest it. If you'd like to roll your old 401(k) over, reach out to your plan administrator or your former employer to ask for the paperwork to complete the transfer. There may be a one-time fee associated with an account rollover.
5. What you're going to do about health insurance
Your new employer may only offer a single health insurance plan or it may offer more than one. If it does offer a choice, look for one that combines the best coverage with the most reasonable cost. Pay attention to the deductible, premium, and co-pay. High-deductible health insurance plans are increasingly common. These are defined as plans that have a deductible greater than $1,400 for an individual or $2,800 for a family.
The good news about high-deductible health insurance plans is that if you sign up for one of these, you can also open a health savings account (HSA). Individuals may contribute up to $3,550 to an HSA in 2020 and families may contribute up to $7,100. Adults 55 and older may contribute an extra $1,000. These contributions reduce your taxable income for the year, and if you use the money for medical expenses, you aren't taxed on it at all. You can also withdraw the money for nonmedical expenses, but you'll pay income tax on the funds plus a 20% penalty. This penalty goes away at 65, though, at which point your HSA becomes like a traditional IRA.
You'll have to make at least some of the above decisions when you take a new job, but don't worry if you realize now that you made a mistake or forgot about something. Reach out to your employer or your retirement plan administrator. They should be able to help you.
