401(k) at a New Job: What’s the Best Approach?
If you’re starting a new job that offers a 401(k) plan as part of your benefits package, congratulations! You’re among the roughly 35% of Americans who have access to pre-tax employer-based retirement plans, according to the Census Bureau.
The key is to make the best of it and get the most out of it with a few key strategic decisions. You can always make adjustments later on, but you’ll be better off in the long run if you avoid common mistakes and start strong from the outset.
Brush Up on the Basics
Even if this isn’t your first 401(k), you should start by refreshing your knowledge of how they work and the rules that govern them. A 401(k) plan allows employers to withhold a predetermined portion of participating employees’ paychecks to invest in retirement funds before those earnings are taxed.
Remember that unlike Roth accounts, 401(k)s require you to pay taxes on every dollar you contribute when you start making withdrawals in retirement. You won’t be able to touch the money in your 401(k) until six months after you turn 59; and, if you do, you’ll have to pay taxes and a stiff early withdrawal penalty.
The most you can contribute in 2022 is $20,500 — unless you’re 50 or older. Then, the IRS’s catch-up contribution rule allows you to contribute $6,500 extra.
Those factors should drive your decision of whether to participate, how much to contribute and how to manage your plan. But there are many other rules, regulations and guidelines that could have major impacts on your money.
Visit the IRS’s page on 401(k)s to brush up before you make any moves at the new job.
Dive Into the Particulars of Your Company’s Plan
After you refamiliarize yourself with 401(ks) in general, it’s time to get to know your company’s specific plan on a granular basis. Your boss or your HR department will give you onboarding materials that lay out the key provisions of their 401(k) plan. Read them all and follow up with questions about anything that’s unclear, but pay special attention to the following:
Type of 401(k)
Most employers offer traditional 401(k) plans, but others have safe harbor 401(k) plans, SIMPLE 401(k) plans, 403(b) plans or Roth 401(k) plans. They’re similar, but they all have important differences in how they’re structured and the rules that govern them. This article presumes that you’re starting a traditional 401(k), but make sure that’s the kind that your company is offering.
Eligibility and Automatic Enrollment
To encourage participation, 401(k) administrators make enrollment easy.
It’s so easy, in fact, that many plans come with automatic enrollment, which means new employees will be signed up automatically unless they opt out. Even so, some employers have a waiting period of a few months or up to a year before their workers become eligible to enroll — automatically or otherwise.
Fund Options and Fees
Unlike personal brokerage accounts or IRAs — which let you invest in just about any kind of fund or security — 401(k)s limit participants to a handful of offerings. Each comes with its own investment breakdown, fees, goals, risk level and performance histories, all of which will be laid out in its prospectus.
Typical offerings include index funds, target-date funds, stock funds and bond funds. Do your research and consider seeking professional help — but just make sure you’re the one who makes the decision. If you wait for automatic enrollment, the plan will invest you in its default fund.
Most experts recommend diversifying your holdings among a mix of assets and taking on more risk when you’re young and less risk as you age.
Company Match
The most important factor of all is your employer’s matching contributions. According to Motley Fool, the median company match is 4% — meaning your employer will match your contributions up to 4% of your pay.
Some match on a dollar-for-dollar basis, others match 50% and others offer a hybrid formula. For example, an employer might kick in $1 for every dollar you contribute up to 3% of your pay and then match $0.50 on the dollar up to 5% or 6%.
No matter the structure, you should always contribute at least enough to maximize your employer’s matching contributions — it’s free money that will be worth far more in the long run than the take-home pay you keep by under-contributing.
After the match, you might want to consider saving in an alternate vehicle like a Roth IRA that allows after-tax savings or a brokerage account that gives you more investment options than your 401(k).
You always own your portion of the contributions, but your employer might have a vesting period that requires you to stay with the company for a set period of time before you take ownership of the company’s matching contributions.
Changing Jobs? You Might Be Able To Bring Your Old 401(k) With You
If you’re moving to a new job with a new 401(k), you can simply keep your old 401(k) with your former employer, where it will continue to grow — you’ll always retain complete ownership. But you also might be able to transfer the funds from your old plan directly to your new 401(k) without paying penalties or taxes. It’s called a rollover, and some employers allow them and some don’t. Check with HR at your new job.
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