Navigating a Job Change

Congratulations on your new job! Whether it's a career switch or work in the same field, leaving one employer for another means you'll be faced with a number of important financial choices. Here's our checklist to help you make your move without taking a financial hit:

New job, new paycheck

Hopefully, a new job means you'll be enjoying a bigger paycheck. If that's the case, remember that it's not what you make but what you keep that counts. Don't forget to earmark a chunk of the increase for Uncle Sam and the state tax authorities. Even if your job change means a lower salary, you'll want to do some tax planning.

How Many Jobs Will You Hold?

Consider the averages:

• 10.7 jobs for men from ages 18 to 40
• 10.3 jobs for women from ages 18 to 40

Average for the youngest baby boomers (born between 1957 and 1964) as of 2005. Source: Bureau of Labor Statistics.¹

Crunch the numbers. Now's a great time to run a projection of your estimated federal and state income tax liabilities. Whether you use a do-it-yourself tax program (Schwab clients can access the tools found at Schwab.com/tax) or hire a tax professional, you'll want to be sure you're not having too much or too little withheld from your new paycheck. Too much means you're giving an interest-free loan to the government all year, and too little means you might be faced with some unpleasant surprises (including penalties) come tax time.

Know your tax bracket. If your new wage pushes you into a different bracket, review these financial decisions:

• Do taxable bonds and money market accounts still make sense in your taxable brokerage account, or would you be better off with tax-free municipals (or vice versa if your new salary is lower)? To compare, divide the muni rate (for a similar level of credit quality and maturity) by one minus your marginal bracket to find the taxable equivalent rate. For example, if your combined federal and state marginal bracket is 30%, you would need to find a taxable rate of 5.7% to equal a tax-free rate of 4% (.04 .70 = .0571).
• A top-to-bottom, tax-efficient overhaul of your portfolio might be particularly beneficial for those in a higher tax bracket. For example, because long-term capital gains and qualified dividends are taxed at a preferential rate, they might be good candidates for taxable accounts whereas investments that generate ordinary income might fit well in tax-deferred accounts.
• Now's also a good time to review the liability side of your balance sheet. For example, if you're carrying nondeductible consumer, auto or credit card debt, you might benefit from consolidating your balances into a lower-cost, tax-deductible home equity loan.
• If you had to relocate for your new job, certain moving expenses may be deductible. See IRS Publication 521, Moving Expenses.
• You might now realize greater benefits from certain other deductions, such as increased charitable contributions. On the flip side, you might find some deductions are now limited because of your higher income (e.g., miscellaneous expenses). Worse still, you might find yourself in the grip of the dreaded alternative minimum tax (AMT) - all the more reason to consider a professional review of your new tax situation.

Has Your Tax Bracket Changed?

Rate	Taxable income: single	Taxable income: married filing jointly
10%	$7,825 or less	$15,650 or less
15%	Over $7,825 but not over $31,850	Over $15,650 but not over $63,700
25%	Over $31,850 but not over $77,100	Over $63,700 but not over $128,500
25%	Over $31,850 but not over $77,100	Over $63,700 but not over $128,500
28%	Over $77,100 but not over $160,850	Over $128,500 but not over $195,850
33%	Over $160,850 but not over $349,700	Over $195,850 but not over $349,700
35%	Over $349,700	Over $349,700

Source: www.irs.gov.

Keep retirement savings on track

Pay yourself first. You may not be willing or able to save 100% of the incremental increase in your wages, but set aside as much as possible. At the very least, you should seek to maintain your current overall savings percentage (see "Saving for Retirement: IRA vs. 401(k)" and "How Much Should You Save for Retirement? Play the Percentages"). Sign up for your new retirement plan, and contribute as much as you can as soon as you're eligible, especially if your new employer offers a matching contribution.

• Watch out for the annual limit - for 2007, it's $15,500 (plus $5,000 if you're 50 or older). The limit applies to each individual, not to each plan. So don't forget to factor in any year-to-date contributions you made to your old employer's plan.

Consider your retirement plan options. You have a number of different options; here's our take (see the table, "Compare Your Options," below):

• Take the cash. The most tempting choice may be to take the money, especially if you're unemployed between jobs. But unless you have absolutely no choice, don't do it. If you take money out of your 401(k) before the age of 59? (or before age 55 if you were at least that old when you left your old job), you have to pay a 10% federal penalty (state penalties may also apply). What's more, you'll be subject to federal, state and, in some cases, local income taxes. The government will also take 20% of your withdrawal as an advance on your tax bill. Finally, you'll lose out on the potential for compound growth on the amount you take out.
• Leave the money where it is, or roll it over into your new 401(k). Most employers preselect the funds available in their 401(k) plans. The ability to choose from 15 or 20 funds, for example, provides a nice range of choices without the hassle of screening hundreds of funds yourself. But if your 401(k) offers only three or four funds, you may want to think about an IRA rollover. Keep in mind that a 401(k) is a one-size-fits-all retirement plan. On the plus side, your employer will likely pay any fees and may offer institutional funds you wouldn't be eligible for with an IRA.
• Roll it over into an individual retirement account (IRA). Like a 401(k), an IRA keeps your money growing tax-deferred but with two major advantages: flexibility and control. An IRA generally allows you to invest your money however you like - mutual funds, stocks, bonds and so on. You'll likely have advice from your IRA provider, and you can reallocate your investments whenever and however you please (minus any trading fees, of course).

However, there are some caveats:

• A qualified employer plan, such as a 401(k), may have more legal protection from creditors than an IRA.
• You can usually borrow from your current 401(k) plan but not from your IRA (not that borrowing is recommended).
• Again, if you were at least 55 at the time of your "separation from service," you could access your old 401(k) funds without penalty (income taxes still apply). If you needed the money after you rolled it over to your IRA, penalties would apply unless you were at least 59 years old (or elect to annuitize your withdrawals for at least five years or until age 59, whichever is longer).
• Finally, if you have company stock in your 401(k), think twice before rolling it over into an IRA. Company stock held in a 401(k) could receive favorable tax treatment if it's gone up in value and you have it distributed directly.

Compare Your Options

	Pros	Cons
Stay in your old 401(k)
	Avoid current income taxes, penalties and 20% withholding. Money continues to grow tax-deferred. Retain ability to roll over at a later date.	Investment choices limited to employer's plan. Plan may limit withdrawals and exchanges between investments.
Roll over to new employer's 401(k)
	Avoid current income taxes, penalties and 20% withholding. Money continues to grow tax-deferred. Easier to track retirement assets. May be able to borrow against your 401(k).	Investment choices limited to employer's plan. Plan may limit withdrawals and exchanges between investments.
Roll over to an IRA
	Avoid current income taxes, penalties and 20% withholding. Money continues to grow tax-deferred. Choose your own investments. Maximum flexibility: You can roll IRA assets back into a 401(k) or convert to a Roth IRA at a later date.	Can't borrow against assets. No special distribution alternatives such as net unrealized appreciation (NUA) treatment for distributions of company stock, or forward averaging. May have to pay annual fee. Beyond state law, traditional IRA assets are generally protected from creditors only to the extent the funds are found reasonably necessary for support (U.S. Supreme Court). Traditional and Roth IRA assets are protected only up to $1 million under federal bankruptcy law.

Source: Schwab Center for Financial Research.

Remember these miscellaneous items:

• Update your employer contact information with financial providers or other entities (e.g., your children's school).
• If you had to move for your new job, don't forget to notify your former employer (and financial providers) of your new address.
• Save all documents related to your separation from service.
• Sign up for direct deposit with your new employer.
• Be sure to ask your old employer about benefits you're entitled to take with you, such as accrued vacation time. Find out about expiration dates of your current health and life insurance benefits, as well as any vested stock options, if applicable.
• Consider your new employer's health care coverage in light of any other coverage you might have available through your spouse.
• Review the basic disability and life insurance amounts offered by your new employer.
• Take advantage of any seminars explaining your new benefits. If you use a tax advisor, consider providing him or her with copies of any employee equity compensation plans. If you don't have an advisor, find out if your new employer offers a financial planning benefit.
• Don't forget to update your resume.
• Put aside an emergency fund equal to three to six months of your after-tax salary - just in case your next job move isn't voluntary.

Starting a new job usually involves a steep learning curve. You'll likely be bombarded by an avalanche of information. Just don't forget your personal finances in the process, and be sure to get help if you need it. A Schwab financial consultant is a great place to start.

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