Thinking of Switching Jobs? It Could Hurt Your 401(k)

Social Security probably won’t pay you enough for a comfortable retirement. To achieve that goal, you’ll need to save independently.

If your employer offers a 401(k) plan, that’s definitely a good place to start. Though 401(k)s aren’t perfect, they offer a few distinct benefits over IRAs.

First, they come with much higher annual contribution limits. Right now, with an IRA, you’re limited to $6,000 a year if you’re under age 50. Otherwise, your annual limit is $7,000. With a 401(k), you can contribute up to $20,500 this year if you’re under age 50. If you’re 50 or older, you get a $6,500 catch-up option that raises that limit to $27,000.

Another perk of having a 401(k) is that many of these plans come with an employer matching incentive. Those incentives vary from company to company. You might, for example, be eligible for a free $3,000 from your employer if you put that much money from your own earnings into your 401(k).

But if you’re thinking of switching jobs, you might lose out on some or all of that free money without realizing it. And that’s something to consider before making a change.

Are you fully vested in your 401(k)?

These days, the labor market is strong, and so a lot of people are seeking out better work opportunities as part of the so-called Great Resignation. If you’re thinking of jumping ship, you’re no doubt in good company. But you’ll need to time your resignation carefully, because leaving your job too soon could mean forgoing employer matching dollars in your 401(k).

Many company 401(k)s come with what’s known as a vesting schedule. Just as matching programs vary from employer to employer, so too do vesting rules. But basically, your employer might require you to remain with the company for a certain period of time before the money it puts into your 401(k) is yours to keep, or yours to keep in full. And if you resign from your job before you’re fully vested, you could lose out on money you were counting on for your future.

Now to be clear, not all companies impose a vesting schedule, so you’ll need to read up on your benefits to see what your employer’s policy looks like. It may be the case that once your employer puts money into your 401(k), it’s yours to keep, even if you quit in short order.

But some companies impose a lengthy vesting schedule that offers no leeway if you quit before you’re fully vested. For example, a company might offer a $3,000 annual match with a three-year vesting schedule, but also impose a rule that if you resign at any point prior to three years, you get none of that money. Ouch.

That’s why it’s important to investigate your vesting schedule before leaving your job. It may be that you have a large match on the table that you stand to lose by quitting now, whereas waiting two or three months could mean getting all of that cash.

Don’t give up free money

Workers with 401(k) plan access are often advised to contribute enough for retirement to snag their employer matches in full. Similarly, it could pay to stay put until you’re fully vested, depending on what that means and what that time frame looks like.

That said, you can rest assured that any money you contribute to your 401(k) out of your own earnings is money you get to keep in full, no matter what. If you start a job, get immediate access to its 401(k), contribute $2,000, and then leave a month later, that $2,000 is all yours. Your employer may not be happy with that turn of events — but it can’t take money away that came out of your paycheck.

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