If you are considering switching jobs to improve your financial status, that is understandable. Just make sure you know what impact your leaving will have on your retirement funds. For example, your 401(K). The wrong decisions now could end up costing you thousands of dollars in future employer matches, taxes, and maybe even penalties. That relatively small pay raise might not be worth the devastating effect the move could have on your retirement.
Here are some things to think about before you make that important decision:
Check on your employer’s vesting schedule
If your employer is matching the amounts that you contribute to your 401(K) plan, those funds are typically not completely yours for several years. In other words, if you leave before you are 100% vested, you will forfeit some of the 401(K) funds that your company contributed. Keep in mind that any funds that you contributed through payroll deductions are always 100% vested, no matter where you work.
Here is an example of a typical vesting schedule:
- After one year of service: 0% vested
- After two years of service: 20% vested
- After three years of service: 40% vested
- After four years of service: 60% vested
- After five years of service: 80% vested
- After six or more years of service: 100% vested
Under this schedule, if you had saved $20 per week for two years, you would have $2,000 toward retirement. If your employer matches dollar-for-dollar, you would have another $2,000 in your account. If you decide to quit, however, you would only receive $400 of your employer’s contribution. That’s a $1,600 impact that changing jobs would have on your future retirement savings!
Consider your options carefully
Most workers have four options for their 401(K) when they leave a company:
- Cash out: This option should be off the table for you. You will owe taxes and penalties, plus you will immediately be pushed into a higher tax bracket. You will be lucky to walk away with half of your money!
- Leave the money where it is: If the investments in your current plan are performing well and the administrative costs are reasonable, this might be a viable option. But while it is better than cashing out, leaving your 401(K) with a former employer will rob you of a certain amount of control. There are better options.
- Rollover into your new employer’s qualified retirement plan: If your new employer offers a 401(K) plan, they will likely accept a direct rollover from your previous plan. You might have to leave your funds in your old plan until you are eligible under the new plan, but many will allow rollovers immediately. Just make sure this is a plan-to-plan transfer and the money is not sent to you. It creates all sorts of complications that a true rollover avoids.
- Rollover into your IRA: This is your best option for a host of reasons, not the least of which is the freedom to choose from a variety of investments not always available in company retirement plans. By using a Self-Directed Rollover IRA, for instance, you not only choose from common stocks, bonds, and mutual funds but also from real estate, private stock, precious metals and other alternative assets. Not only that, but you avoid the high administrative fees that can stunt the growth of your retirement savings. And you make the decisions on which investments are right for you.
It’s up to you
The financial fallout from changing employers might be significant, but there is no reason to compound the consequences by making poor decisions with your 401(K) funds. The money to which you are entitled is not a short-term windfall but a long-term investment in your future. Approach it that way!
Take control of your 401(K) funds when you leave your job