Job Changes and Your 401(k): 5 Hidden Ways Retirement Savings Can Slip Away
Written by
Karen Doyle
Edited by
Cory Dudak
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Changing jobs can be a great way to move your career forward, increase your salary and provide better opportunities for you and your family. Yet, a job change can also have a negative impact on your retirement savings if you don’t know what to look out for.
Here are 5 ways job changes can drain your retirement without you even realizing it.
1. Forgotten Employer-Sponsored Plans
The U.S. Department of Labor maintains a Retirement Savings Lost and Found Database, which was established through the SECURE 2.0 Act of 2022. This database helps workers find and recover benefits they may have accrued at previous jobs. If you have ever worked a job that offered either a defined benefit plan — like a pension — or a defined contribution plan — like a 401(k) — you may have an account in the database.
To find out, log on to the database website. You’ll need to create a login.gov account if you don’t already have one. From there, you can search by your Social Security number to see if there are any accounts you may have forgotten about. You can then reach out to your former employer to find out what you need to do to roll those balances into an IRA you can keep an eye on.
2. Loans That Aren’t Repaid
If you have taken a loan from your 401(k) or other employer-sponsored retirement plan and you leave your job before the loan is fully paid back, the outstanding balance is considered a withdrawal from the plan. That means you’ll pay regular income tax on the amount you haven’t paid back, plus a 10% penalty if you’re under 59½.
Here’s an example. Suppose you borrowed $10,000 from your 401(k). You’ve been making payments through payroll deduction, and now your loan balance is $5,000. You leave your job (either because you’ve found a new one or were laid off or fired). The $5,000 remaining loan balance is now considered a premature distribution from your 401(k). On your next tax return, that $5,000 will be considered income and taxed accordingly, and you’ll also pay a 10% penalty if you’re under 59½.
3. Matching Contributions and Vesting Schedules
Some employer-sponsored plans have matching contributions. Your employer may match the contributions you make to your retirement plan account — typically either dollar-for-dollar or 50 cents on the dollar — up to a certain percentage of your pay. This is a great benefit and can really help boost your retirement savings. of course, it’s important to understand how your company’s matching contribution works.
It’s common for an employer-sponsored plan to use a vesting schedule for matching contributions. This means your matching contributions aren’t available to you right away. For example, if your company uses a five-year vesting schedule, 20% of your matching contributions are available to you after one year, and an additional 20% becomes available each year until you are fully vested after 5 years.
The reason for vesting matching contributions is to encourage employees to stay with the company. While you wouldn’t want to make a decision to stay or leave a company based on vesting alone, it can be worth considering. At least, you want to pay attention to the date on which your matching contributions vest. If you’re going to leave a job where you have money in a retirement plan that has a vesting schedule and you can wait until the next vesting date, you could walk away with hundreds or even thousands of extra dollars in your account.
4. Your Contribution Level
One of the big advantages of contributing to a retirement plan that deducts your contributions from your pay before you get it is you don’t miss what you never had. You can create a budget based on your take-home pay after your contributions, effectively putting your retirement savings on autopilot.
Another good strategy is to increase the percentage of your salary you save every time you get a raise. So, if you get a 4% raise, increase your salary deferral rate by 2%, and get the other 2% in your paycheck. Just make sure you apply the same philosophy to your salary when you take a new job. If you’re making 8% more at your new job, set your retirement plan contribution level 4% higher than it was at your old job.
5. Automatic Enrollment
Since the SECURE 2.0 Act was signed into law in 2022, most companies that have an employer-sponsored retirement plan must automatically enroll new employees in the plan at a certain contribution percentage unless the employee opts out, according to the IRS. This provision is helping more workers to participate and save for their retirement, but it’s important to understand it.
When you get a new job, your employer will automatically enroll you in their retirement plan at a specific contribution level, which typically starts at 3% of your salary. If you want to contribute at a higher rate, you’ll need to elect that higher amount. In addition, if you don’t select the funds you want your contributions invested in, your employer will choose the investment, which will likely be conservative and may limit your investment returns.
Don’t let a job change derail your retirement savings plans. Make sure you know where all your retirement money is, and how to make the most of it. After all, you don’t want to leave money on the table.
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