When I was a new graduate, I worked several temporary jobs until I landed my first full-time position as an accounting assistant at a large company in Atlanta. The economy was sputtering at the time, so I felt fortunate to have the job. However, I also knew that I wasn’t cut out for a lifetime of sitting in a cubicle, crunching numbers from 9-to-5, and wolfing down lunch during a hurried, 45-minute break.
Because I didn’t want to keep my job for the long term, I made a huge mistake. I didn’t participate in a 401(k) or any type of tax-advantaged retirement account. The company offered a 401(k), and even paid matching funds, after several months of employment.
But I didn’t realize that if or when I left the company, I could take my contributions and their earnings with me. I just assumed that I’d have to forfeit my retirement — so what was the point of getting started?
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If a 401(k) Is Available, You Should Use It
Now I know that workplace retirement plan contributions that come from your paycheck, plus their earnings, are always yours to keep. You are always 100 percent vested in your deposits.
However, depending on the plan rules, matching and profit-sharing funds paid by your employer may come with a vesting schedule. So, you could lose some or all of that portion of your account if you leave a job before vesting.
401(k) Options When You Leave Your Employer
Once you’re no longer employed, you have these options for your retirement account:
- Roll over some or all of it to an IRA aka an individual retirement account.
- Roll over some or all of it to a new workplace plan.
- Leave it with the old employer.
- Cash it out.
I’ve listed these in order of best to worst. Rolling over the entire balance of an old 401(k), 403(b), or 457 into another tax-advantaged account is the wisest move you can make. Putting your retirement money in a new or existing IRA or in a plan at your next job allows you to avoid tax and the 10 percent early withdrawal penalty.
Your traditional 401(k) can be moved into another traditional plan or IRA without triggering any tax consequences. Likewise, you can roll over a Roth workplace plan into another Roth plan or IRA.
Leaving your retirement with your old employer means that you can’t make any new contributions to the account, so it would just stay idle there. Abandoning your account isn’t as good as doing a rollover, but it’s much better than cashing out and seeing your balance beat down by tax and penalties.
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The Cost of Delaying Retirement Savings
There are many 401(k) mistakes you can make, but not participating has got to be the most damaging to your financial future. I don’t like thinking about how much more I’d have in my retirement account today if I’d started contributing to a 401(k) the moment that I had the chance. But let’s run through some scenarios so I can make my point.
Let’s say you invest $500 a month, or $6,000 a year starting at age 25 and continue that wise habit for 40 years. With an 8 percent average annual return, you’d end up with over $1.74 million to start spending at age 65.
But if you wait until age 35 to begin the same investment routine, you’ll only have $745,000 at age 65. In other words, 10 years of procrastination cost you $1 million! That’s an expensive mistake.
If you wait until middle age to begin saving for retirement, you’ll have a lot of catching up to do. If you’re 45 and want to have $1 million in 20 years, you’ll have to invest about $1,700 per month with an average return of 8 percent.
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