In today’s workforce, it’s increasingly common for young professionals to change jobs frequently, marking a departure from the traditional model of lifelong employment with a single company and a generous pension plan.
Fortunately, retirement savings options like 401(k) plans and individual retirement accounts (IRAs) offer flexibility, allowing individuals to transition between jobs without forfeiting their retirement funds. However, frequent job changes can still pose challenges to maintaining a solid retirement savings strategy. Here are some practical steps you can take to ensure your retirement plan remains on course:
- Open a traditional or Roth IRA
If you find yourself between jobs without access to an employer-sponsored retirement plan, consider opening an IRA. Whether traditional or Roth, IRAs provide tax advantages, allowing you to invest a portion of your income for retirement. These accounts are particularly beneficial for self-employed individuals, part-time workers, or those with irregular incomes. Plus, you can continue contributing to an IRA even after enrolling in a new employer’s 401(k) plan.
- Roll over your 401(k)
If you switch jobs and have a 401(k) with your previous employer, consider rolling over the funds into your new employer’s plan. This straightforward process, known as a 401(k) rollover, enables you to consolidate your retirement savings into a single account with potentially better investment options and lower fees. Most brokerage firms managing old 401(k) accounts are happy to assist with the rollover process.
- Open a rollover IRA
If you prefer more diverse investment options than those offered by your new employer’s retirement plan, you can transfer your savings into a rollover IRA. Unlike 401(k) plans, rollover IRAs typically provide a broader range of investment choices, including mutual funds, ETFs, stocks, and bonds.
- Consider a 401(k)-to-Roth IRA conversion
Converting your traditional 401(k) or IRA into a Roth IRA offers the advantage of tax-free growth on your investments. While this conversion requires paying taxes on accumulated gains, it can be a strategic move, especially if you anticipate being in a higher tax bracket during retirement. Consulting with a financial professional can help you assess whether a conversion aligns with your long-term financial goals.
By proactively managing your retirement savings through these strategies, you can navigate the challenges of job-hopping while staying on track for a secure financial future.
- Make up for lost time
Imagine you’ve had a gap in your employment, during which you couldn’t contribute to your retirement accounts for several months. However, you’ve now landed a new job with a higher salary. In such a scenario, it’s worth considering increasing your retirement contributions to compensate for the missed period. Whenever you receive additional income, whether expected or unexpected, think about directing it towards replenishing the retirement accounts you couldn’t fund previously.
Once you’ve made these catch-up payments, you might discover that you can comfortably maintain the higher contribution level over time. This is advantageous because the more you save, the greater your long-term financial security.
- Pay attention to employer contributions
Employers vary in their contributions to employees’ 401(k) accounts. Some match employee contributions fully or partially, while others may not contribute at all. When transitioning between companies, particularly if the new employer’s retirement plan is less generous, it’s crucial to consider this factor.
Ideally, you’ll want to ensure that the total amount going into your 401(k) either remains consistent or increases over time. If your new employer’s contribution is lower, you may need to boost your own contributions to make up for the shortfall.
- Understand the vesting period
If your company contributes to your 401(k) plan, there may be conditions attached, such as a vesting period. This means you may not fully own those contributions unless you stay with the company for a certain duration. For instance, the company might reclaim its contributions if you leave before completing two years, which is known as the vesting period.
To maximize the benefits of your company’s retirement plan, it’s wise to stay until you’re fully vested. Some companies operate on a tiered vesting schedule, gradually increasing the portion of contributions employees keep until full vesting.
Review the documentation accompanying your 401(k) plan to understand its vesting policies thoroughly. Leaving the company before full vesting could mean missing out on significant retirement funds.
