New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
-advertisement -
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Auto CDs &
Retirement Checking &
Taxes Personal

Even job-hoppers should contribute to retirement plans

Greg McBrideDoes contributing to a tax-deferred retirement plan such as a 401(k), 403(b), or 457 plan make sense if a job change is looming? Those mulling a career change or seeking a move from part-time to full-time employment may identify with this.

First off, contributions made by the employee are not "lost money." Your own contributions, plus or minus any investment gains or losses, are yours to keep.

Employer contributions, however, may be subject to a vesting schedule. Those plans subject to a vesting schedule enable the investor to own more and more of the employer contributions over time. Even if only fractionally vested, that fraction is free money.

- advertisement -

For example, consider a part-time employee who earns $10,000 a year and contributes 6 percent -- or $600 -- to a 401(k). Let's say the employer matches 50 cents for every dollar contributed by the employee, up to a maximum of 3 percent of the employee's salary, a common policy. The employee contributed $600, and the employer kicked in $300. If the employee was only 25 percent vested upon leaving the company, the employee departs with $75 of the employer's contribution. While it may not sound like much, that sum represents a 12.5 percent return on the $600 employee contribution. And this is before considering any investment earnings in the interim.

Delaying participation may involve a longer waiting period than many realize. Take, for example, someone who plans to change jobs within the next year and decides to bypass the enrollment opportunity in the current retirement plan. However, once changing jobs, the investor will likely have to wait before becoming eligible to contribute to the new plan. Those who switch jobs after a year and then hit a six-month waiting period in the new job have delayed any participation for 18 months. Also, not every employer offers a retirement plan, so delaying participation now may mean an indefinite delay to saving for retirement.

Alternatively, employees who begin contributing now begin to amass a retirement nest egg that can grow for a longer time. It also establishes a good habit: paying yourself first. This builds financial discipline and will come in handy when encountering that waiting period upon switching employers. Already in the habit of living on less, the investor is more likely to use wisely the extra cash in the new paycheck. That six months of excess cash can be used to fund an IRA contribution, or can be stockpiled to double-up on 401(k) contributions once eligible. For 2002, those younger than 50 can contribute up to $11,000 to a 401(k), and those 50 and older can contribute up to $12,000.

What happens to the vested balance after a job switch? Depending upon the balance, you may be able to leave it intact in the current plan. Or the new employer may permit a transfer into its plan. A third consideration is a direct rollover into an IRA. It is very important not to cash out the balance, as mandatory 20 percent withholding and a 10 percent early withdrawal penalty apply. This isn't the down payment for a new car -- this is your retirement security in its infant stages.

One final caution is to refrain from borrowing from a 401(k), as any outstanding loan balance must be repaid shortly after termination from the current employer.

Greg McBride is a financial analyst for

-- Posted: March 15, 2002




Looking for more stories like this? We'll send them directly to you!'s corrections policy
Print   E-mail

CDs and Investments
Compare today's rates
1 yr CD 1.09%
2 yr CD 1.29%
5 yr CD 1.70%

  How long will your savings last  
  How to reach a savings goal -- with scheduled payments  
  Watch your savings grow with regular deposits  
CDs and Investing Basics
Set your goals with an investing plan.
Develop a savings plan
Every kind of CD explained
Treasury bonds and more
Pros and cons of annuities
All about IRAs
Bank or credit union?
Best rates for CDs, more

CD rates in your area  
Bankrate's Top Tier Award for best quarterly CD and MMA performers  
Track the prime rate, other leading rates  
Savings basics

- advertisement -
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here. ®, Copyright © 2016 Bankrate, Inc., All Rights Reserved, Terms of Use.