Many workers who change jobs in the wake of the pandemic — whether for more money, better opportunities for advancement, or flexible hours — risk overlooking an important factor: their retirement savings.
Those who increase their income by changing jobs should be able to save more money, which bodes well from a retirement savings perspective, says Chris Dolan, financial planner at Baird in Seattle. But a worker who changes jobs may lose some employer-sponsored retirement benefits, most often those offered through 401(k)s, he adds.
There are many things to consider for job-hoppers. They can choose to leave it with their former employer or transfer it to a 401(k) at their new job or to an Individual Retirement Account, among other options. The choice depends on your investment preferences, balance, fees, and investment options, as well as your comfort level managing your own money, among other factors.
Here are some of the considerations financial advisors recommend for savers who are changing jobs.
Cashing out can be expensive
Workers leaving a job are often tempted to cash out their retirement account, particularly if their balance is low, but this can decrease their nest egg over time. Not only will they incur taxes and potentially a penalty every time they cash out an account, but they won’t benefit from compounding.
If you cash in your 401(k), for example, you’ll have to pay taxes on the money you withdraw and a 10% penalty if you’re under age 59.5.
However, those who quit their jobs in the year they turn 55 or later can withdraw money from their 401(k) without the 10% penalty if they adhere to the payments rules. substantially equal periodic until they reach 59½. But they will still pay income taxes and will have diminished their retirement savings.
“You should be disciplined even if it’s a small amount,” Dolan says. “These small amounts add up to be something big.”
Consider employer correspondence and acquisition times
Today’s job seekers may naturally think about “inflation and the possibility of increasing their salary,” but they may ignore what they’re leaving on the table in terms of their 401(k), says John Campbell, head of wealth planning for the eastern region of US Bank Private Wealth Management.
Many employers fully or partially match the contributions employees make to their 401(k) plans, up to a certain percentage of their salary. These contributions vary, but of the so-called defined contribution plans administered by Vanguard Group in 2021, most plans were between 3% and 6% of salary.
When looking for a job, “you really want to focus on matching your employer,” says David Stinnett, director and head of Vanguard Strategic Retirement Consulting. Set aside to gain and grow over decades, the employer match “really becomes a pretty big part of your net worth,” he says.
Workers can still take the money they contributed to a 401(k) when they leave a company, but corporate matches are often subject to a vesting schedule — a set length of time an employee must stay in the business before the money is 100% his. . In a common vesting schedule, employees are invested in 20% of the company’s match each year, so the employee is fully vested after five years, Dolan says.
But acquisition times vary. In 2021, 49% of defined-contribution plans administered by the Vanguard group granted employees immediate employer matching contributions, while 25% of plans had five- or six-year vesting schedules, Vanguard says.
Leave before you’ve fully earned your rights and “you risk leaving significant amounts of business matches on the table that you won’t be able to take with you,” Campbell warns.
Employees can transfer a current 401(k) plan to another tax-advantaged retirement account, such as another 401(k) or an IRA, without tax consequences if they handle the transaction correctly.
Transfers in which funds are transferred directly from one pension plan administrator to another are generally recommended. If your plan administrator does not arrange such a transfer, you can make a check payable to your new trustee or custodian for your benefit and deposit it into your new plan or IRA. In this case, there is no legal requirement as to how quickly the transfer must be completed, although an employee’s current retirement plan or a new plan may have timing requirements. In both cases, no tax is withheld.
However, if your plan administrator sends you a check in your name for a qualifying rollover distribution, which they can do either at your request or if you have a small balance and are not directing it, they will withhold the taxes. If you roll over the distribution and want to defer tax on the full taxable amount, you will need to add funds from other sources equal to the amount withheld. You will have 60 days to deposit the money into your new retirement plan or IRA or you will have to pay taxes on the distribution.
Rolling your retirement funds into a 401(k) with your new employer is often the most convenient option, advisers say. It’s usually easier to keep track of your money if it’s in one place, and your new plan may offer company consideration and access to financial advice.
Almost all 401(k) plans allow you to carry over balances from a previous plan, says Stinnett. Additionally, while most 401(k) plans allow employees to start making new contributions to their retirement plan immediately after joining the company, some have a waiting period. Of the defined contribution plans administered by Vanguard in 2021, 72% allowed employees to begin making new contributions immediately, while 8% required a year of service before employees were eligible. The remaining 20% require between one and six months of service.
If you have to wait, “you want to make sure you don’t lose a year,” Stinnett says. “Especially if you’re a young worker, you want to open an IRA and contribute to it.”
Indeed, IRAs can be good alternatives to 401(k)s in many cases. If your new employer’s 401(k) plan charges high administrative fees or offers funds with high expense ratios, you can also consider an IRA and find low-fee mutual funds and exchange-traded funds.
Additionally, 401(k) plans typically offer a limited selection of investment choices, typically mutual funds. If you want to broaden your investment options, say to individual stocks, you might want to consider an IRA for at least some of your money.
One factor to consider when determining whether to move to a 401(k) or an IRA: Contribution limits for employer-sponsored 401(k)s are higher than for IRAs: In 2022, $20,500 for those under 50 versus $6,000, respectively. Additionally, in the event of a personal bankruptcy filing, 401(k)s offer more creditor protection than IRAs.
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