What to Do When You Change Jobs
checklist to move your financial plan forward as you start a new job.
When you leave a job or take on a new one,
there are multiple factors to consider
that could significantly influence your
financial future. "If you're starting a
new job—or even if you're just looking
for employment—it may be a good time to assess and take
steps to improve your financial situation," explains Stuart
Ritter, CFP®, a senior financial planner with T. Rowe Price.
"When you leave a job or take on a new one, there are multiple factors to consider that could significantly influence your future," explains Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price. As you make the transition into your new position, consider each of the following items:
Your new workplace retirement plan
Contribute to your new workplace retirement plan as soon as you are eligible—and make an effort to contribute more than you did to your former plan. Ritter suggests deferring at least 15% of your salary, if possible, including the amount of your company's matching contribution. "Many variables change when you switch jobs," Ritter explains. "Your salary may be higher or your commute might cost less, enabling you to contribute at a higher rate than you were before, without significantly affecting your finances."
Select a diversified mix of stock and bond funds appropriate to your time horizon. Your new employer's plan may include target-date funds, which provide an easy way to achieve an age-appropriate allocation. For a complete picture, remember to look at the assets in your old 401(k) plan and any other retirement accounts you may own when weighing the investment choices in your new plan. Of course, diversification cannot assure a profit or protect against loss in a declining market. All mutual funds are subject to market risk, including possible loss of principal.
Options for Your Previous 401(k)
While there are several actions you can take with your former workplace retirement plan, the right one for you depends in large part on your personal circumstances and long-term financial goals. As you compare the following options, keep in mind that tax-deferred growth potential may be the greatest benefit for your retirement assets. Preserving that tax advantage can substantially improve your ability to build wealth over time.
- Roll it into an IRA. Usually offers access to a wider range of investment options (as compared with keeping the assets in an employer-sponsored plan), making it easier to create an appropriate investment portfolio. Also, allows you access to your money at any time.
- Roll it into your new employer's plan. May offer lower-cost investment options and potential access to investment services. Your new plan also may permit loans, depending on plan provisions.
- Leave it with your previous employer's plan, if permitted. Your previous plan has familiar, potentially lower-cost, investment options, and it may provide access to investment services.
- Cash it out. You'll owe income tax on the distribution and, if you're younger than age 59½, you're likely to have to pay a 10% early withdrawal penalty. The high cost of cashing out makes it an option to be chosen only in the case of a financial emergency. "A lot of people see the transition to a new job as an opportunity to get a windfall from their old plan," Ritter says. "But unless you absolutely need the money now, you're likely to be better off if you preserve the assets' tax-advantaged growth potential." Cashing out your old workplace 401(k) will subject your savings to taxes and penalties and will significantly diminish your long-term savings potential, shown here.
A new job means a new set of benefit choices. While your family likely still has the same needs for life insurance, disability coverage, and other coverage, use this transition to find the most efficient way to meet them. "Your new employer may offer a benefit that you previously had to buy on your own, such as life or disability insurance. Or it may not offer a benefit that you rely on," Ritter says. "Evaluate your needs and compare the available benefits offered by your new employer and your spouse's employer."
Flexible spending account
Even if you change jobs midyear, sign up for a flexible spending account (FSA) at your new job, which allows you to pay for qualified medical expenses and child-care costs with pretax dollars. Also take full advantage of your FSA at your previous job by submitting all qualified expenses you've incurred so far this year. Everything from orthodontics to programs for quitting smoking are considered qualified expenses. If you have a question about what's covered, contact your plan administrator.
You'll need to name beneficiaries when you sign up for your new workplace retirement plan. Take this opportunity to check the designations on all of your financial documents and update them if necessary. You may have had another child, or you may have divorced and married again. "You may still have your parents designated as beneficiaries from before you were married," Ritter says. "If you don't update the paperwork, your assets may not be distributed as you wish when you pass away."
You probably will change jobs many times throughout your career. Making the right decisions during the transition is critical to keeping your financial goals on track. "Think about the ways your new job offers opportunities to optimize your financial situation," Ritter says. "Employers offer a variety of benefits that can significantly influence your financial position now and in the future."