New Job? Don't Make These 7 Mistakes With Your Benefits
In September 2016, total nonfarm payroll employment in the U.S. rose by 156,000. If you were among those Americans who recently landed a new gig — or plan on landing one within the near future — congratulations! But as you get your benefits and retirement planning set up at your new workplace, don't make these seven mistakes.
1. Not Setting Up Your New Retirement Account Before December 31st
Make to sure to set up your new employer-sponsored retirement account before December 31st. Otherwise, you won't be able to reduce your 2016 taxable income by making contributions before Tax Day (April 17th, 2017) or the day you file your federal tax return, whichever is earlier. If you wait until the new year to set up your retirement account, any contributions made before Tax Day will reduce your 2017 taxable income — and you'll lose the opportunity to reduce your 2016 AGI (Adjusted Gross Income) by any contributed amount.
2. Not Completing a 401K or IRA Indirect Rollover
If you had a balance of less than $5,000 in your previous job's 401K or IRA plan, there is a good chance that you received an automatic cashout with a 20% withholding from your employer for applicable taxes. From the last day of your employment, you have 60 days to put the entire balance of the previous retirement account (including the mentioned 20% withholding!) into a new employer-sponsored retirement account that accepts rollovers. This process is known as an indirect rollover.
You'll get that 20% withholding money back from the IRS in next year's tax return. In the event that your new employer's retirement account doesn't accept a rollover from your previous account, consider opening an IRA with a local financial institution before the 60-day deadline. (See also: A Simple Guide to Rolling Over All of Your 401Ks and IRAs)
3. Leaving W-4 Forms Alone
Depending on a variety of factors, your old W-4 tax withholdings may not cut it at your new gig. To figure out whether you're withholding too much (or too little), grab all of your latest pay stubs, find a copy of last year's tax return, and visit the online IRS Withholding Calculator.
After punching in your data, this tool will provide recommendations on how to adjust your W-4 with your new employer to make sure that you meet your tax liability and minimize your refund. There's no sense in over-withholding and expecting a large refund, since the IRS doesn't pay interest while it sits on excess withholdings. That's money better kept in a savings or retirement account, where it can gain interest and compound over time.
4. Missing the Deadline to Make an Additional Estimated Tax Payment
If the IRS Withholding Calculator were to tell you that you're seriously behind your tax liability, you'll probably need to make amends pronto, lest you end up owing Uncle Sam at tax time. It's to your benefit to make an additional estimated tax payment to reduce or eliminate such a liability. For example, in the event that you know that there is an end-of-year bonus or commission check arriving before January 17, 2017, you have the option to use part of that check to make an estimated tax payment with Form 1040-ES.
Make sure to use the IRS Withholding Calculator to estimate the right amount to mail to the IRS with Form 1040-ES and keep a photocopy of both the form and check for your own records.
5. Not Enrolling in a New FSA Plan Within 30 Days
You have up to 30 days from your hire date to enroll in an employer's flexible spending account (FSA). If you miss that deadline, you'll have to wait until your company renews its FSA plan, your plan administrator announces an open enrollment period, or you have a qualifying life event, such as changing marital status or having a baby.
6. Forgetting About Balances in Previous FSA Accounts
You may be so busy training at your new job and completing paperwork that you forget about remaining benefits at your previous employer. Check the rules from your previous FSA account regarding the expiration date of available money once you separate from your old employer. Most FSA plans provide a grace period to use the money, but some of those deadlines may be as early as the end of the month in which you separate from your employer. Unless you use your FSA funds in full by the applicable deadline, you'll lose them all.
7. Going More Than Two Months Without Health Coverage
As you're transitioning from one job to the other, keep an eye on the start and end dates of previous and current health plans. Under the Affordable Care Act (ACA), better known as Obamacare, you owe a fee for any period greater than two months in which you, your spouse, or your tax dependents don't have qualifying health coverage. In most cases, the penalty fee is 1/12 per month of 2.5% of your household income or $695 per adult, whichever is higher.
Being uncovered for only one to two months, qualifies you for a short gap exemption and you're not liable for the fee. Find out whether or not you're able to claim a health coverage exemption with HealthCare.gov's Exemption Screener.
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