So, you’ve landed a great new job — awesome! Your new company’s 401(k) plan is the first thing you consider, right? OK, maybe not on the top of your list? Starting a new job is the perfect time to start thinking about your 401(k) and retirement plan, whether you have one or not. Don’t let this opportunity fall to the bottom of your list.
Here are a few 401(k)-focused factors to consider when starting a new job.
Will you have a higher paycheck?
When you get a raise, it is a good idea to increase the amount you contribute to your 401(k). Saving for retirement is important at all ages, and this is an easy way to increase the dollar amount flowing into your account. Besides, you aren’t used to having this money in your pocket, so you won’t miss it when it’s taken out of your paycheck and put into your 401(k). Remember, the contribution limit for 2014 is $17,500, or $23,000 if you are over the age of 50 (the contribution limit for 2015 is increasing to $18,000, or $24,000 if you are over the age of 50). If you have already met the limit, ask your financial advisor whether you should consider contributing to an individual retirement account (IRA) for even more retirement savings.
Will your new employer be contributing to your 401(k)?
Sometimes, employers provide a 401(k) match as part of their employee benefits package. They may match your contribution dollar for dollar or a percentage of your contribution up to a set maximum amount. If your employer offers a match program, find out the maximum employer contribution limit, and at the bare minimum, contribute that amount. If I offered you a bundle of cash — a few thousand dollars, perhaps — would you turn it down? I should hope not! Turning down a bundle of cash is similar to leaving your company match on the table. So, don’t let free money slip through your fingers.
Make that contribution, and get that match.
What should you do with your old 401(k)?
You have a few options here:
1. You may be able to roll your old 401(k) over to your new 401(k) plan.
Consolidation of an old 401(k) account(s) to a new 401(k) account may be a practical option for some. If you consider taking this approach, you will need to do some research in advance. What investment options are offered in your new employer’s plan? It is sometimes common for many employers to offer 401(k) plans with a limited number of investment options that do not allow for a well-diversified investment allocation (e.g. emerging markets equity funds, small-cap value funds, etc. are rarely offered as options). Additionally, the operating expense ratios of the available options can often be high, depending on the funds that are offered. Look for the operating expense ratios on your new 401(k) plan’s website or your statement, and compare them to similar funds to see if the expenses are reasonable.
If rolling your old 401(k) over to your new 401(k) is the best option for you, talk to your new 401(k) plan administrator to ensure the steps are taken to rollover your account correctly.
2. You may prefer to roll your old 401(k) account over to an IRA.
Whether you already have an IRA or plan to open one in the future, rolling your 401(k) over to an IRA can be wise. This gives you the ability to invest your account in a variety of mutual funds, stocks or bonds to help build a well-diversified investment allocation. Additionally, contributing to an IRA can give you the flexibility of choosing low-cost mutual funds, which can save you money in the long-term over generally expensive 401(k) investment fees. You can research inexpensive mutual funds to fit your investment needs, or consult a financial advisor to help you build an investment allocation.
Notice how these options do not include taking your old 401(k) as a distribution? Depending on your age, you could get hit with a penalty from the IRS if you take a distribution from your old 401(k) account as taxable income. It is typically a good idea to keep those dollars in a tax-free or tax-deferred account as long as possible.
Remember to name your beneficiaries when signing up for your new 401(k) plan. It is generally a good idea to keep your beneficiaries consistent across all retirement accounts and according to your estate plan, so be sure to make those updates to your new plan. This will allow your 401(k) account to pass directly to the person(s) of your choice in the event that you pass away.
Above all, don’t forget to enroll in your new plan! While this may seem obvious, many employers require a short waiting period before new employees are eligible to contribute to their 401(k) plan, so make sure to enroll as soon as you are able. If there is a waiting period, set a reminder, circle the enrollment date on your calendar, set an alarm on your smartphone…just don’t forget!