Although hiring is slowing down, many people are still considering moving jobs and companies. Be sure to understand what you need to know about your 401K and other potential implications for your retirement planning.
Understand how your 401K works
It is important to understand how your 401K works. Before (or when) switching jobs, make sure you know what 401(k) options exist — whether you want to cash out, leave the money in your previous employer’s plan, move to your new employer’s plan, or roll over into an IRA. You don’t want to make any errors as you review what to do with your plan. There are several avenues to pursue. You may want to consider consolidating your 401Ks from previous companies into one account. When you “rollover” your 401(k) accounts, you can choose whether to invest the funds into either a traditional IRA or Roth IRA. Here is a link to a free 401K calculator to look at different scenarios.
Avoid withdrawing money from your 401K
When switching jobs it is possible that you need money to help you accomplish that. Be very careful simply using your 401K money, it can be very expensive in the long term. Early withdrawals from your 401(k) — which is when you take out any money before you turn 59½ — are subject to taxes, an additional 10% penalty fee (exceptions apply), and a mandatory 20% federal withholding rate. Plus, taking early cash distributions means your savings will no longer grow tax-deferred, and you’re depleting the nest egg that you’ll eventually need in retirement. Also, even if you take a loan out against your 401K, it negatively impacts your compounding gains.
Know the benefits of your 401K at your future employer
When you’re looking for a new job, be sure to research if your prospective employer offers a 401(k) match. Although most employers offer traditional 401(k) plans, not that many actually match a portion of their workers’ contributions. Make sure you work somewhere that has this perk. Companies may match up to 6% of your eligible pay, so take advantage of that free money by contributing 6% exactly. Also, know the fees that you may need to pay as well.
A 2020 study by Vanguard reported that 71% of companies matched $50 cents for every $1 an employee contributed up to 6% of the eligible compensation. Only 21% of these companies match employee contributions dollar for dollar.
Know your 401K investment approach
It is important to review your 401(k) investment selections and align them with your risk tolerance, age, and retirement goals. 401(k) plans will offer mutual funds with various risk tolerances or levels, ranging from conservative to aggressive. It’s often up to the employer to dictate how frequently employees can make investment changes in their 401(k)s, whether it’s daily, monthly, or some other interval. When you set up your new account, you’ll want to make sure you’re maxing your match and setting up a diversified portfolio so your money is doing the heavy lifting for you.
Social Security Implications
Workers only need 10 years’ worth of work history to qualify for benefits, but the Social Security Administration (SSA) determines your benefits by looking at your 35 highest-earning years. If you work less than 35 years, your benefit is calculated using 0s for each year necessary to add up to 35 total years. Time not working can impact your lifetime earnings numbers. You may need to work longer. You can create your social security account online and review your current situation.
If you need help considering exiting, the Charitable Payraise is another option to consider to maximize the assets you have as well. You can learn more about what we do here.