28 Oct 2021 The Impact of the “Great Resignation” on Family Finances
You may have seen articles referencing the “Great Resignation,” a term coined by Anthony Klotz, a psychologist and professor at Texas A&M, referring to several months this year having record-smashing resignations, according to data from the Bureau of Labor Statistics. The uptick in resignations may partially be attributed to a pent-up desire to change jobs, combined with the pandemic changing how people think about life, work, and whether we’re on a trajectory we like. Obviously depending on whether you’re an employer or employee, this shift may strike different chords to you. My husband and I both changed jobs this year, making us part of the “Great Resignation.” Although there are many dynamics to explore (the tension between high unemployment and high job changes, unequal salary levels for current employees vs new hires), for the purposes of this post, I will focus on the impact of a married couple having two job changes within one year. I also recognize we are lucky to be employed, and that may not be the case for others part of this greater trend.
When the year started, I thought our tax year would be straightforward. And now, by mid-October, I think I’ve re-run tax projections 3-4 times! Between changing my job in May, selling Wesley’s ESPP shares, Wesley changing jobs in September, making Roth contributions early in 2021, and changing health care plans back to a high deductible plan, we’ve had to re-evaluate various elements of our financial life multiple times this year. I thought I’d share how those adjustments added different layers of complexity and highlight the importance of mid-year planning.
- Retirement plan contributions: This may be the most obvious topic to address. When changing jobs mid-year, you will need to recalculate your retirement plan contributions to account for your new salary and pay period schedule. Wesley and I both had a few weeks off in between our jobs, meaning we each “lost” about one pay period for contributions. This just means that we’ll have to readjust our contribution amount again in 2022 to spread out our contributions evenly throughout the year. I have a reminder set for myself to change our contributions. One other thing to note: some retirement plans offer Roth contributions, and some don’t. We can help analyze whether your contributions should be pre-tax or Roth.
- Employer Stock Purchase Plan (ESPP) shares: One new thing to our tax situation this year was selling Wesley’s ESPP shares. Ryan has posted a video in the past with suggested strategies for how to approach an employer stock purchase plan, if you work for a company that offers one. Wesley joined his last company at a very opportune time, with a low grant price. When his black-out window ended earlier this year, we decided to donate shares with long-term gains and sell the rest of his shares. [Side note- I did not take my own advice last year and we held onto shares instead of selling them. It worked in our favor because of the pandemic and the market swings, but generally, I would recommend selling when you receive your shares! Anyway, back to this year.] By selling his shares, we added a sizable amount to our income this year. For the sake of this post, I won’t get into the nitty gritty details of the unnecessarily complicated taxation of ESPP shares but to summarize, we likely pushed ourselves out of eligibility for the Roth contributions I’d already made earlier in the year. We also adjusted our tax withholdings for each pay period to account for that income change.
- Roth contributions: I thought I was ahead of the game this year because we contributed the maximum to our Roth IRAs early in Q1. And then we sold ESPP shares which increased our ordinary income, plus our salaries increased with job changes, completely changing our overall income for the year and potentially making us ineligible to make Roth contributions. There are several ways to correct excess Roth contributions, depending on when you make the correction. You can correct it during the calendar year the excess contribution occurred, prior to filing taxes for the calendar year, or after filing taxes if the excess was not caught. I’d rather just keep the contribution in our accounts if possible, so we’re taking steps to try to keep our Modified Adjusted Gross Income under the Roth contribution limit for 2021. One adjustment is rather than making Roth 401(k) contributions, we are making pre-tax contributions this year and will likely switch to Roth 401(k) contributions next year. I input our estimated income and deductions into our tax planning software (which is super neat), and hopefully we will remain under the limit for 2021.
- Health insurance plans: We are both covered through Wesley’s health insurance coverage at work. For the first half of 2021, we were not enrolled in a high-deductible plan. When he switched jobs, we enrolled in the HDHP HSA plan. The new employer’s benefits are great and had a TON of resources to guide employees through the process. However, there are some details that I knew to pay attention to that were not included in any of the benefit enrollment instructions. When you switch to a health care plan with an HSA mid-year, you can’t contribute the maximum amount to an HSA. Instead, you’re limited to the ratio of how many months of the year you’re enrolled in the HDHP (unless you enroll in December, and you can claim full year if you remain in a HDHP for the entirety of the following year). These contribution limitations were not written out anywhere within the enrollment information. I’ll just call that reason #478 to work with a financial planner when making your benefit selections! We have another perk of switching back to HSA – a few months of pre-tax contributions help lower our MAGI for our Roth contributions.
- New hire documents & benefits: The IRS website has a tool to use if you have multiple jobs or a working spouse. It’s a helpful tool, albeit cumbersome, so you would want to have recent paystubs for current jobs and final paystubs for previous jobs in order to receive the most accurate results. I used the tool, and was proud of myself when I confirmed our taxes paid YTD were right on track for what we owe for the year. The tax adjustments I’d made earlier in the year had kept us on track and we no longer needed to have additional tax withheld each pay period. I’ll add a little disclaimer that in the grand scheme of taxes, our situation is still relatively simple and a tax professional may need to be brought in to help with a more complex set-up.
- Other general adjustments: We donated appreciated securities this year, and we also may increase our charitable giving this year over our normal 10% to further reduce our income. I may be slightly over-prioritizing my desire to not have to withdraw the excess Roth contributions and earnings. I think that’s more from an administrative laziness rather than the actual financial impact of withdrawing excess contributions and earnings. Sometimes things happen, situations change, best-laid plans go astray, and there’s always a solution to be found.
I hope you found some nuggets to help you out as you’re approaching year-end, or maybe you’re also part of the “Great Resignation” like Wesley and me. You may want to revisit Geoff’s post from earlier this month on other year-end items to address if this brought up any questions you may have in your own situation and as always, reach out to us for help!