Switching Jobs? Here’s a Checklist to Get Your Financial Sh*t (or finances, money, life, your choice) In Order
I heard you’re quitting your job. Or you’ve quit already. Or maybe you’re just thinking about it. You might be saying goodbye to a job that made you miserable, or hello to a career that’s going to make you even happier. Perhaps you’re breaking into the chaotic but fantastic world of freelancing.
Whatever the case may be, let me be the first to congratulate you!
Are you a little freaked out? Don’t be.
More and more people are job hopping . It’s less about being lazy and more about figuring which path will lead you toward the most success.
Switch jobs. By all means, switch twice. But before you do, make sure you’ve got your finances in order. Unsure? Here’s a checklist to guide the way.
Rollover or Transfer Your 401(k)
401(k)s are a joy to behold when you’re employed. The problem is that once you leave a job, you and your employer stop contributing to your 401(k). What doesn’t stop are your 401(k)’s fees. A whopping 60 percent of people don’t know they’re paying fees. 401(k) fees are like ghosts: insidious and potentially insanity inducing. Avoid them at all costs.
So rollover or transfer your 401(k), because just taking the money from your 401(k) before you turn 59.5 years old will generally have a hefty tax penalty. A transfer is when you move the investments in your 401(k) directly from one provider to the another. Simple to do, but rarely allowed. If you want to check, ask the 401(k) provider of the company you’re leaving whether your account can be transferred ACAT to another firm.
ACAT is pronounced like “a cat”, by the way.
Rollovers are a little trickier. When you rollover your 401(k), it’s liquidated. It might be a good idea to put that money in an Individual Retirement Account (IRA), which has tax benefits for retirement savings. You can either have the money sent to you, or opt for a “direct rollover,” which is when your 401(k) provider sends the money straight to your IRA provider.
Choose a direct rollover! If you get the money as a check and forget to deposit it into your IRA in 60 days, you’ll receive a really harsh penalty from the IRS. That’s your money. Keep as much of it as you can.
Figure Out What’s Up With Those Newly-Offered Stock Options
Let’s say that, in addition to your salary, your new job is also offering you stock options. Lots of startups and tech companies do this, so there a few things to realize:
- If you’re receiving Employee Stock Options (ESOs), your company hasn’t bought stock for you, they’re giving you the option to exercise stock options. Essentially, you’re being offered what will hopefully one day be an employee discount on stock.
- Typically, when you’re offered ESOs there’s a vesting period, which is basically a waiting period. After the vesting period is over, you can buy the stocks.
- By no means are you obligated to buy the stock. However, if the value of stock rises above the ESO strike price and you sell it, you can make money since you bought it “discounted.” Imagine buying a Ferrari for the price of a Honda, then selling it at market Ferrari price.
- Take a long hard look at your contracts and agreements. Most contracts have a vesting period, and those stocks won’t be yours until it’s over.
- There’s also typically a cliff, a time hump after which a portion vests on a specific date (rather than gradually until then). A typical 1 year cliff on a 4 year vesting schedule means after the 1 year is over, you get 12 months vested all at once. Afterwards, every month 1/48th of the total stock is vested.
- Check out the 83(b) election. When you file the 83(b) within thirty days of the grant, you can often avoid getting hit with huge unexpected tax bills when vesting begins. (Talk with a tax advisor and/or a lawyer about the 83(b) election to learn more.)
Freelancing? We Got You
Set Up An LLC/S Corp
I love that we live in a time where freelancing is becoming a new norm.
As an entrepreneur myself, if there’s one thing I could tell you it would be to protect yourself at all times.
Protect yourself against scams, shady business partners, and paying for stuff you don’t have to pay for.
Limited Liability Companies (LLCs) and S Corps do exactly that. Both LLCs and S Corps can help you avoid paying unnecessary taxes or giving creditors access to your personal assets. S Corp owners file business returns, while LLC owners file personal tax returns with their income reported there.
This article from the Freelancers Union can help you sort out which option is best for you. If you can afford it, chatting with a tax advisor and/or a lawyer about this kind of thing is a good idea.
Also, Get A SEP IRA
SEP IRAs (simplified employee pensions) are perfect for freelancers. They’re designed for small business owners and those of us who are self-employed. Because as a freelancer, chances are you’re going to be extremely busy not only working but launching a business.
While you’re busy hitting deadlines for your clients, you might miss your own. Trust me, I know.
That’s why SEP IRAs are awesome for freelancers. Time-wise, they’re way more flexible than IRAs. With an extension, you can set up and contribute to your SEP IRA all the way until October. For Traditional or Roth IRAs, the deadline is in April. SEPs also allow you to contribute almost ten times as much as Traditional or Roth IRAs: $53,000 annually as opposed to only $5,500.
SEPs are also tax-deductible. The more money you put in your SEP, the less taxes you have to pay. You can read more about SEP IRAs here.
Oh, And One Last Thing
Please, please, please set up a rainy day fund. Or, as it’s been called before at The Billfold, a F*ck Off Fund. This is important for anyone thinking about making a transition, but critical for freelancers. Peace of mind will allow you to work better and focus on your projects at hand without worrying when a client ghosts you or the next contract falls through. Even when you’re stressed about work, you shouldn’t have to stress about money. Let that sink in for a second.
How much should you have in your rainy day fund?
People say three to six months of living expenses. Not salary — expenses (how much you actually spend). If the idea of saving up a half a year’s worth of purchases seems impossible, don’t panic. Set up an auto-deposit from your checking account or set aside 10 percent of your new paycheck every month. You’ll get there in time.
Some people keep this money in a savings account, but another option is to invest your money so it can potentially grow. Index funds like broad-based exchange traded funds (ETFs) are great because they’re liquid. That means you can cash out your investments quickly.
You don’t need to have saved up an entire rainy day fund to transition to a new job, but start ASAP.
Fifty dollars a week if you can. Thirty. Ten. Whatever you can set aside after making student loan payments, rent, and other necessities (i.e. coffee).
Remember…
Above all, keep a calm head, snacks within reach, and don’t get conned. With the sheer number of financial services available today, it’s easy to throw money at the wall and hope that your bank account will somehow benefit. Stick to basics: make money and protect yourself.
Vicki Zhou is the co-founder of WiseBanyan, the world’s first free financial advisor. She’s an engineer turned entrepreneur and knows that the struggle is real. Follow her @vickizhou1 or @wisebanyan.
