...with your ability to save for retirement.
Many years ago, it was fairly common for an employee to start and finish their career with the same employer. Along the way, they usually earned a healthy pension to live off of while in retirement. Now, however, it is far more common for an employee to switch jobs between 10 and 15 times over the course of their career. According to the Bureau of Labor Statistics, a person now changes jobs about 11 times between ages 18 and 44.(http://careerplanning.about.com/b/2014/02/21/how-often-do-people-change-careers.htm)
While frequent job changes can result in an accelerated career path, they can also inadvertently result in a diminished ability to save for retirement. Before you make another job change, you should consider the following:
1. Many employer-sponsored retirement plans have a vesting period between 3 and 5 years for any employer contributions. In other words, if your 401k account (or other similar employer-sponsored retirement account) is comprised of employer contributions and your personal contributions, you will only get to keep the employer’s contributions to your account if you are vested. Some employers allow gradual vesting over a multi-year period while others impose a strict years of service requirement before any vesting will occur. That period of time can easily reach out to 5 or 6 years. If you leave your employer before you are fully vested you will leave some, if not all, of your employer contributions “on the table”. 2. Many employer-sponsored retirement plans require that a new employee wait a specified period of time before they are eligible to contribute to their retirement account. Oftentimes, this waiting period is anywhere between 3 and 12 months. Some employer-sponsored retirement plans also have a waiting period before a new employee is eligible to receive employer matches or contributions to the retirement account. If an employee switches jobs relatively frequently, they may find themselves with months or even years of time during which they are not allowed to participate in and/or receive employer matched contributions to their retirement account.
3. When an employee switches jobs, the employee can no longer contribute to their prior employer’s retirement plan. Sometimes the employee will roll the assets in their old retirement account into their new employer’s retirement plan or into an IRA. More often than not, however, the prior employee simply leaves their old retirement account where it is and then starts over again with a new retirement account in their new employer’s retirement plan. An employee’s failure to properly roll over the assets in their prior employer’s retirement plan can end up costing the employee retirement funds. For example, retirement accountholders face a variety of fees. The administrative headaches associated with maintaining numerous fairly small retirement accounts can be minimized and the fees can be reduced when these small retirement accounts are consolidated into one retirement account. Employees also face the prospect of mismanaging a rollover. Usually, the best way to accomplish a rollover is to instruct your prior employer to send the assets in your retirement account directly to your IRA account or to your retirement account with your new employer (this is only an option if the employer’s plan allows rollovers). Employees frequently run into trouble when they ask their prior employer to send them the assets in their retirement account and then they fail to deposit all of this money into another retirement account. When retirement moneys do not move directly from one retirement account to another they face the possibility of taxation and may also incur early withdrawal penalties.
4. Sometimes, employees are tempted to cash out their retirement account when they switch jobs. If at all possible, employees should not succumb to this temptation! Cashing out means an employee will be hit with taxes on the money they take and may also incur a 10% early withdrawal penalty. Cashing out also means the employee will have less money that otherwise would compound in a tax-deferred environment over many years. If you are facing a job or career change, it helps to map out the potential impact this change will have on your retirement savings program. If you know you will have a period of time when you will not be eligible to participate in your new employer’s retirement plan or will not be eligible to receive your employer’s matching contributions, try to make up for this gap by separately putting money into an IRA account.
If you have already maxed out on your annual IRA contribution, you can still save additional money. It is worth it so save for retirement even if some of your money is saved in a taxable account. If you have questions about the impact of a job change on your retirement savings or need assistance in rolling over an old retirement account, please contact your investment advisor here at Burke Lawton Brewer & Burke. We can walk you through the rollover process and help ensure that your rollover is accomplished properly.