When you change jobs, an assortment of taxes and fees could significantly reduce your retirement savings. Before making any significant career moves, be sure to take a close look at 401(k) vesting schedules and waiting periods.
Here are some 401(k) mistakes that job switchers make:
- Leaving before you’re vested.
- Not saving during the waiting period.
- Saving less when an employer matches less.
- Not saving when your employer doesn’t offer a 401(k).
- Cashing out your old 401(k).
- Failing to shop around for the best tax-deferred account.
- Making rollover mistakes.
Leaving Before You’re Vested
You can always take your 401(k) contributions with you when you leave a job. But you won’t be able to keep your employer’s 401(k) match or profit-sharing contributions unless you are vested in the plan. Around 30% of 401(k) plans provide immediate vesting for matching contributions, according to the Profit Sharing/401(k) Council of America. The majority of companies require you to stay with the employer for a number of years before you can keep any of the match, or allow you to keep a gradually increasing proportion of the match based on your job term.
If you are choosing to leave your current job and you are close to the end of the vesting schedule, you should consider sticking around if the date is relatively close.
Not Saving During the Waiting Period
68% of companies allow new employees to contribute to their 401(k) immediately when joining the company, however, some employers require you to wait between one and three months (15%) or even an entire year (11%) before you can start saving in the 401(k) plan.
If you’re not part of the profit-sharing or 401(k) plan, you do have other options such as IRA and Roth IRA accounts.
Saving Less When an Employer Matches Less
A 401(k) match is a great incentive to save for retirement. 30% of 401(k) participants choose to save exactly enough to get the maximum possible employer contribution, but just meeting the match threshold may not be enough for a secure retirement.
Some people only save when they are paid to save, but that shouldn’t be the only reason you are doing it. People need to be saving 10% to 15% of their salary, starting at a young age. So if your new employer offers smaller matching contributions, you should make up the difference by saving more on your own.
Not Saving When Your Employer Doesn’t Offer a 401(k)
Only 41% of full-time workers between ages 21 and 64 participate in a pension or retirement account at work. It’s important to save something, even in years when you’re not getting any help from your employer.
Cashing Out Your Old 401(k)
A third of retirement savers cash out their 401(k) when they leave or change their job. Workers who cash out must pay income tax on that amount and, if they are younger than 55, typically face a 10% early withdrawal penalty. A worker in the 24% tax bracket who has a $3,000 401(k) balance would receive just $1,980 after taxes and penalties if he or she cashed out before retirement.
Failing to Shop Around for the Best Tax-Deferred Account
There are several ways to maintain the tax-deferred benefits of your 401(k) when you leave a job. You can leave your money in your former employer’s plan, roll it into an IRA or transfer your balance into your new employer’s 401(k) plan.
You want to compare the available investment options and the costs of your current and former plan. Sometimes 401(k) plan sponsors are able to negotiate low investment fees for participants. But if the 401(k) plans available to you carry high fees, consider moving your nest egg into an IRA with lower costs and more investment options.
Making Rollover Mistakes
Once you decide to move your money, take care to avoid taxes and penalties. Ask your former employer to directly transfer your savings to the financial institution hosting your IRA or your new employer’s retirement plan. This way, you’ll avoid having income tax withheld and don’t have to worry about the 60-day time limit for depositing the entire balance, including the amount withheld, into a new tax-deferred account before additional taxes and penalties may be applied.
However, consider leaving behind any company stock from your former employer, which gets special tax treatment when held in that employer’s 401(k) plan. If you’re close to retirement, it’s worth noting that retirees can begin taking penalty-free 401(k) withdrawals at age 55, while they must wait until age 59½ to take IRA withdrawals without facing the 10% early withdrawal penalty.