Few transitions in life create more excitement--and anxiety--than starting a new job. But as your focus is drawn into a future filled with promise, please don’t neglect the host of decisions required in the present, and a golden opportunity to break from any bad habits of the past.
So many decisions are thrust upon us at the outset of a new job that we have a tendency to minimize those choices by choosing not to choose. Subconsciously, at least, we’re prone to settling for the default option, but that may be a mistake. Here are a few of the most important decisions you’ll want to make mindfully:
1) How much money will you send the government?
Whether you’re an employee or a contractor, you’ll have decisions to make regarding how much federal and state tax should be withheld from your paycheck. If you’re making more money at the new job, you may well want to consider having more taxes withheld if the additional income is likely to move you into a higher tax bracket.
Or perhaps you’d gotten into the habit of relying on a big refund each Spring and you’d rather withhold less so you can put more of that money to work throughout the year. Regardless, it would be wise to run the withholding decision by a Certified Public Accountant, who can help you determine exactly what the impact of your new job might be on your taxes. And if you self-prepare your taxes, a year in which you change employment may be a good year to seek some professional help.
2) Could it make sense to change banks?
You’ll likely be setting up a new direct deposit, so while you’re at it you might consider re-evaluating your bank of choice and selecting a better option. If you’re still hanging on with one of the big-name brick-and-mortar options, it’s likely that you could reduce your fees and increase the interest rate on your savings by switching to an online bank.
3) Actively participate in selecting company benefits, particularly health insurance.
The broad topic of company benefits opens the door to a multitude of decisions. The biggest consideration for most of us is the handling of health insurance, and the increased cost and uncertainty in this space may well nudge you to consider an option you may not have used in the past. For example, a compelling choice for many has become the high deductible health plan (HDHP).
And why, exactly, would you want a higher deductible on your health plan, requiring more out-of-pocket cost? Well, for one, it tends to be a cheaper plan, and because very few companies are paying full freight for a Cadillac health plan with little-to-no out-of-pocket costs, the savings may well be passed on to directly to you.
But the more compelling reason to consider higher deductible plans is that in so doing you’ll likely become eligible to use a Health Savings Account, or HSA. The HSA is the only type of account where the IRS gives us a tax break on both the front and back end. When you make a contribution, you should receive a tax deduction, and as long as a distribution is used to pay for qualifying medical expenses, there is also no tax when you take the money out.
And unlike the Flexible Spending Account (FSA), the HSA isn’t a use-it-or-lose-it affair. You can accumulate--and even invest--unused contributions and use those funds for retirement if there’s anything left.
Yes, the HSA option may increase the complexity of the way you pay for medical care--something I generally recommend avoiding--but the opportunity to make most of your medical expenses tax deductible is worth it for the majority of people. Once you’ve determined how to handle your deductible, you’re ready to determine exactly what type of plan you want--a PPO or HMO, for example--but these decisions are often based more on preference and the availability of your doctors.
4) Take any free life insurance.
In addition to health benefits, most companies also offer several different options for group benefits, like life insurance. Many companies offer a small policy for free, but beyond the gimme, you can likely find better, cheaper term life coverage outside of your company plan that will also be portable if (read: when) you move to another company. The move for most, therefore, will be to take whatever free group coverage your company gives you and supplement with private policies for your remaining life insurance needs.
If, however, you have any medical conditions that make it impossible (or prohibitively expensive) to purchase life insurance privately, a group policy that doesn’t require underwriting may be a great option to consider.
5) Insure your biggest asset--your ability to earn income--through disability income insurance.
Most of us have a much higher probability of becoming disabled in our working years than of dying. While workers’ compensation insurance might pay you if you’re hurt on the job, disability income insurance will pay a portion of your salary if you become disabled off the job. Unfortunately, it’s a complex--and potentially costly--form of insurance. Enter group disability insurance.
Most companies provide a group long-term disability policy (LTDi) that comes at no cost to you and generally pays 60% of your pre-taxed earnings. Unfortunately, if the company pays the premiums (good), the benefits to you would be taxed (bad), leaving you navigating more expenses on the homefront with a lot less income.
Furthermore, you have to read the fine print to see how the word “disability” is defined in the group policy. If it’s an “own occupation” policy, it should, like you’d expect, pay a benefit in the case that you’re unable to perform the material duties of your own occupation. But an “any occupation” policy won’t pay unless you couldn’t do any job (like sticking a smiley face sticker on someone’s shirt as they walk through the door).
You may have a more robust “own occupation” policy and you may even have the ability to pay the taxes on a company-paid policy, but probably not. Most of us will need to supplement our group disability insurance with a partial, private policy to adequately insure this risk.
6) Don’t miss out on free money!
A new company likely means a new 401(k) or other corporate retirement plan, and hopefully it also means getting a company match--free money that the company contributes on your behalf as long as you make an effort to save for your financial future. The typical match is 3% of your salary, but that may come in the form of either a 100% match on the first 3% of your contribution or 50% on the first 6% of your contribution (or some other variation, of course).
Regardless, even if you don’t have your financial ducks in a row, it’s almost always imperative to grab this free money. It’s like the equivalent of getting a 50% to 100% rate of return on every new investment you make that will then be compounded forever more into the future. It’s just too good to pass up. Sure, I want you to save even more than 3% or 6% to give you a better chance of reaching your retirement goals, but maxing out your match is something you really need to do.
Meanwhile, don’t forget about your old 401(k), if applicable. You may have the option to leave that money in the old plan, but that’s rarely the best move. You may also have the ability to transfer it directly into your new plan--something that may, indeed, be worthwhile if you like the investment options in the new plan. But if not, you’ll also have the option to do a “direct rollover” from your old plan into a Traditional (or Roth, if applicable) IRA. Most importantly, don’t do nothing.
7) Don’t leave any lesser benefits on the table, either.
We’ve hit all the big benefits decisions, but, hidden in the human resources archives, there are often other, less prominent benefits that can be valuable, like dental or vision insurance, prepaid legal, reimbursements for education or gym memberships and matching contributions to your favorite charities.
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