401(k) Tips for Job Hoppers
401(k) plans can be especially tricky to use for people who change jobs frequently. Between waiting periods to sign up for the plan and vesting schedules that don't let workers with short job tenures keep employer contributions, you can miss out on many of the benefits of 401(k) plans if you don't stick with an employer for at least a few years. Here's how to make the most of a 401(k) plan as a short-term employee:
Sign up as soon as the waiting period ends. While most employers allow you to join the 401(k) plan with your first paycheck (64 percent), a few make you wait three months (15 percent), six months (8 percent) or even a year (10 percent) to start using the 401(k) plan, according to a Plan Sponsor Council of America survey of 613 plans with 8 million participants. Find out if your employer has a waiting period, and start saving in the plan as soon as you can.
Watch out for 401(k) match delays. Just under half (46 percent) of employers immediately provide a 401(k) match to new employees, PSCA found. But 30 percent of companies require a year of service before they give workers a 401(k) match. Other firms have waiting periods of three months (13 percent) or six months (11 percent) before new employees qualify for a 401(k) match. Make sure you get the match as soon as you are eligible for it.
Meet savings requirements. The most common 401(k) match formulas are 50 cents per dollar saved up to 6 percent of pay and $1 for every $1 saved up to 4, 5 or 6 percent of pay. In both of these cases you need to save as much as 6 percent of your paychecks in order to get the full employer contribution that is offered. For someone earning $50,000 per year, saving 6 percent of pay is equivalent to $250 per month.
Don't leave before you're vested. Even if your employer's contributions are in your account, you don't get to keep them until you are vested in the plan. Only 38 percent of companies offer immediate vesting of company contributions, according to the PSCA survey. Some companies let you keep a percentage of the company contributions based on your years of service, but you typically don't get to keep all of it until you have been with the company for five (17 percent) or six (16 percent) years. Other companies don't allow you to keep any of the match until you have a specific number of years of job tenure, most often three years (12 percent). If you're close to becoming vested in the 401(k) plan, sticking around until you are could get you thousands of extra dollars for retirement.
Simplify your accounts. When you leave a job, you have a choice to leave your money in your old 401(k), transfer it to a new 401(k) or roll it over to an IRA. All three of these options will preserve the tax-deferred status of your money. But it can make investing easier if you consolidate your old 401(k)s into a single IRA when you change jobs. When you only have one set of account statements to keep track of it's easier to tell if your assets are properly diversified, monitor fees and expenses and track investment growth.
Avoid cashing out. It can be tempting to cash out your 401(k) each time you job hop. But an early 401(k) withdrawal triggers both taxes and, if you are under age 59 ½, a 10 percent early withdrawal penalty. A 30-year-old worker in the 25 percent tax bracket who withdraws $5,000 from a 401(k) will receive just $3,250 after taxes and penalties.
Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google+ or email her at ebrandon@usnews.com.
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