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So, you want to switch jobs? Don’t forget your finances at the door

March 13, 2023 • 5 min read

What we'll cover

  • Four things you can do with your 401(k) after changing jobs

  • What to consider if you take a salary cut

  • Where you could allocate new funds if your pay increases

The average person changes jobs every four years. Whether you’re just exploring your options or putting the finishing touches on your updated resume, be sure to consider the financial implications of taking a new role. 

Time between paychecks

If you’ve left your old job but haven’t started your new one, think about how much money you need to pay for necessities during the transition. Even after you start working, you probably won’t receive your first paycheck right away. Having an extra cushion of cash can help tide you over until you start getting paid.

Once you start, ask your employer how many paychecks per month you can expect and if they accommodate digital banking for direct deposits. Knowing how frequently you’re paid can help you budget for your monthly expenses.

Retirement implications

You may be moving companies, but you still have your old 401(k) account. Thankfully, you’ve got choices:

  1. You can withdraw money from your 401(k). If you go this route, you’ll probably incur early withdrawal fees and pay taxes, so give some thought to your situation and whether you’re in an emergency and need to use your investments to fund expenses. 

  2. If you think your money will be better off in your new company’s 401(k), you can request a direct rollover. This will help you avoid immediate taxes and enjoy the advantages of your new plan. Speaking with a tax professional can help you decide what’s best for you.

  3. You may discover more investment choices by rolling your 401(k) into an Individual Retirement Account (IRA). Once you withdraw the funds, you have 60 days to roll them into another retirement account (like a traditional IRA) before you’ll have to pay taxes.   

  4. Most employers will also let you leave your 401(k) with them. But once you’re no longer an employee, you won’t be able to contribute to the account.

A 401(k) paid to you is subject a mandatory 20% IRS withholding, even if you intend to do a 60-day rollover.  If you borrowed money from an employer-sponsored 401(k), don’t forget your outstanding loans. Failure to pay them back may result in loan offset, which means you could be stuck with a 10% penalty up to the amount borrowed. Speaking with a tax professional can help you decide what’s best for you. 

New benefits and insurance policies

Your new employer might offer exciting perks like wellness programs, tuition reimbursement or employee stock options. While you take advantage of the benefits, don’t let changes to your insurance go unnoticed. Carefully read the fine print of your medical, dental, disability and life insurance policies to stay up to date on your coverage.

What you might walk away from

Did you normally earn a large sales commission? Or maybe you always received a 5% annual raise. Switching jobs might cause you to lose income you’ve received beyond your salary. On the retirement end, you might miss out on valuable matching contributions. Some employers wait to match your 401(k) until the end of the year, so making a mid-year switch could mean forfeiting this money.

Career development and advancement

When considering a new job, don’t shy away from negotiating a higher salary. This process may feel awkward, but it will help you verbalize your value and earn the compensation you deserve. Prepare for the conversation by researching the market average and factoring in your industry experience. 

New roles come with new responsibilities. Switching jobs may give you the opportunity to learn new things — furthering your career and making yourself more marketable in the future. 

Your new financial standing

Once you’ve finalized your salary, it’s time to adjust your finances accordingly. Did you switch industries and take a salary cut? You might need to adjust your spending to save the same amount as before. If your earnings are lower now, you may want to consider a Roth IRA conversion.

Maybe you jumped up a pay grade. If that’s the case, you may have entered a new tax bracket, which means a portion of your money may be taxed at a higher rate. But don’t worry, you’ll still take home a bigger paycheck, which can help you allocate more toward paying off debt or saving. You could also spend or invest the additional amount.

If your salary remains similar, ask your new employer if they offer annual raises. This will help get a better picture of your financial outlook and the amount you can expect to earn over the next few years.

Remember the big picture

Switching jobs can be full of fun and exciting opportunities, but the financial implications go beyond a new salary. Before making the jump, consider how a new role might impact your savings, investments and career development. By staying informed and active, you can assess all your options and take full advantage of the right choice for you.

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