3 Important Things to Consider When Starting a New Job
Key Points:
There are many new things to consider when starting a new job, and not all of them relate to the job itself.
Tax withholding, health insurance plan choices, and retirement plan options are all important decisions when starting work at a new company.
Making sure you understand your personal and financial situation is an important step in making decisions that affect your future financial success.
Starting a new job tends to fill people up with nervous energy. It’s exciting to meet new people and learn new things. However, it can also be nerve racking to figure out the logistics and the overall flow of your day. The financial decisions that need to be made as you begin your new job may also add to that stress. After figuring out where the lunchroom is and how to use the coffee machine, there are a few key things that you will have to think about to ensure that you set yourself up for financial success.
Withholding the right amount of income taxes
One of the most misunderstood forms that you fill out when you start a new job is the Form W-4. The W-4 is an IRS form that is used to provide your personal information to your employer, as well as the information needed to calculate the amount of taxes that should be withheld from your paycheck. The form comes with a worksheet that assists with determining the amount of “allowances” that should be used when calculating the income tax withholding.
Allowances are based on several things but relate to circumstances in your life that will affect your ultimate tax liability, such as filing status (e.g. single or married), how many children you have, or if you hold more than one job. The higher the allowances on the W-4, the less taxes that are withheld. You may hear people say, “just select zero allowances and you will be fine.” This “one size fits all” is not a good recommendation as it may result in too much withholding, or in some cases, not enough.
Ideally, you want to match your allowances and corresponding tax withholding to your projected tax liability. Withholding too much during the year gives the government an interest-free loan, but withholding too little could cause an underpayment penalty and an unwelcome bill at tax time. For many individuals, this calculation involves more than just salary. There are certain situations when you may want additional tax withholding, such as when recognizing current-year investment income or capital gains that are not subject to withholding.
Fortunately, the IRS does provide a “Withholding Calculator” that can help monitor your withholding situation during the year. This can be located at www.irs.gov. If you determine that adjustments need to be made, you can simply provide your employer with a revised W-4.
Making sure your medical expenses don’t cause you to go bankrupt
Understanding your employer’s health insurance plan and selecting the appropriate coverage is extremely important, given both the costs of insurance and medical care. Selecting the correct plan depends on your specific family situation, age, health, and anticipated family planning.
For example, single individuals that are in good health and not planning on getting married or having children in the near future might find that a high deductible health care is the right choice. While there is a higher out-of-pocket cost initially for any medical expenses that do occur, these plans generally have the lowest premium cost. In addition, high-deductible plans allow you to contribute to a Health Savings Account (HSA). An HSA account is like an IRA, in that you can make tax deductible contributions to the account while also growing the investments in the account tax-free. An additional benefit is that any distributions from the HSA will also escape taxation if used for qualified medical expenses.
As another example, however, if you or your family member has a chronic illness or if you expect to incur large medical care costs, looking into a more extensive coverage plan with higher premiums might be the better answer. Choosing a higher premium plan, which typically comes with a lower deductible, could actually end up saving you money during the year.
Building your nest egg
Having a thorough understanding of your company’s retirement plan options and taking advantage of those options could mean the difference between living comfortably in retirement, or having to downsize and reduce your standard of living as you reach your golden years.
Some companies that offer a retirement plan such as a 401(k) will automatically enroll you in the plan, while other companies will give you the option to enroll. Some companies may also have a “waiting period,” where you will have to remain employed for a certain period of time before you are eligible to participate in the plan. After you have enrolled, it’s important to set a contribution rate that will not only allow you to maximize your company’s “match” contribution (if applicable), but will also satisfy your retirement goals.
Many employers match a percentage of your compensation or 401(k) contribution to your retirement plan account. There are “safe harbor” plans where the employer contributes a fixed percentage of your compensation regardless of your contributions. However, for plans that only match the employee’s 401(k) contribution, if you do not contribute up to the maximum employer match percentage, you will be in essence giving away “free money.”
While it is usually always good to save, front-loading your contributions into the first part of the year may also prevent you from taking advantage of the entire company match, as there are limits during the year on how much you can contribute into your plan. If you prefer to front-load your contributions, check with your company’s retirement plan administrator to see if the plan has a year-end “true up” to ensure you’ll still receive the maximum company match contribution.
Of course, the level of contributions into your retirement plan also depends on your cash flow situation. If you are not able to cover your monthly living expenses, contributing to your company’s retirement plan will be very difficult. As your situation changes with raises or bonuses, however, it is important to build savings in your tax-deferred retirement accounts.
Key take-away
There is always a lot to learn when starting a new job. In order to set yourself up for success, you need to not only master the job itself, but you will also need to have a good handle on the tax implications of your employment, the company’s health insurance plan options, and your employer’s retirement plan offerings. Being knowledgeable on all these topics and how they relate to your overall financial well-being will keep you on track for personal success.