You’ve likely heard of The Great Resignation with a surge in people quitting their jobs over the past year. Whether they’re setting out to find a new job with guaranteed remote work or completely shifting career paths, Americans are coming out of the pandemic reevaluating their work life and making big changes.
As we head into a new year, the hot job market doesn’t look like it’s going to cool down. Before you consider joining this latest workforce trend, however, pay attention to how your retirement plan will be affected. This includes knowing your 401(k) options when switching jobs — whether you want to cash out, leave the money in your previous employer’s plan, move to your new employer’s plan or rollover into an IRA — while making sure you don’t make any mistakes during the process.
“Making the right decision is key,” says Ty Young, founder and CEO of Ty J. Young Wealth Management, one of the largest wealth advisory firms in Atlanta. In fact, there are four common mistakes that he sees employees make with their retirement funds when leaving their job and starting a new one. Here’s how you can avoid them.
Mistake 1: Having multiple 401(k)s in different places
“People have had — and can have — one, two, three jobs in this era of ‘The Great Resignation,’ which means multiple 401(k)s in different places,” Young says. “They need to consolidate those 401(k)s into one place.”
If you’ve left a series of jobs over the years, it’s easy to leave a trail of 401(k) accounts that you didn’t know what to do with. To make life a heck of a lot simpler, merge them. You can easily simplify your portfolio management when you consolidate your retirement accounts from various former employers into one central place. Plus, portfolio rebalancing and mandatory account withdrawals are easier to make when you only have one retirement account instead of three.
You can combine 401(k)s and other accounts into a Rollover IRA with brokers like Charles Schwab, Fidelity Investments, Ally Invest® and Wealthfront. When you “roll over” your 401(k) accounts, you can choose whether to invest the funds into either a traditional IRA or Roth IRA. The main difference of a traditional versus a Roth IRA is how they’re taxed. (Read Select’s explainer on the difference between a traditional and Roth IRA.)
Rolling over a 401(k) is pretty easy to do. You can transfer the money in your old 401(k) to either your new employer’s 401(k) plan or into an IRA account. Every broker has its own process, but most of the time you can do it online these day. Your best option is to choose a direct rollover where the funds go from your 401(k) to a new retirement account so you don’t touch them (which could trigger withdrawal fees). You have 60 days, per the IRS, from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA.
Mistake 2: Cashing out too early
Getting another job is not an excuse to tap into your old 401(k) account.
Early withdrawals from your 401(k) — that is taking out any money before you turn 59½ — are subject to taxation, an additional 10% penalty fee (exceptions apply) and a mandatory 20% federal withholding rate. In addition, 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.
Mistake 3: Not taking the free money
When you’re looking for a new job, pay attention to whether your prospective employer offers a 401(k) match. Given that most employers that offer traditional 401(k) plans match a portion of their workers’ contributions, it’s likely you’ll qualify for this perk.
Young advises workers with a 401(k) match to know exactly how much they need to contribute to get 100% of that match — and prioritize investing that amount from day one on the job. For example, if your company matches up to 6% of your salary, and you contribute 6%, you’re doubling what you’re able to put away.
Mistake 4: Accepting the default 401(k) investment allocation
When you change jobs, take time to maximize your new 401(k) retirement plan and understand the investments it offers. Young encourages employees to look at their 401(k) investment choices and fees to make sure that they align with their risk tolerance, age and retirement goals.
Generally, 401(k) plans will offer mutual funds with varied risk, 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.