There are many reasons you might consider a job to be temporary. Perhaps the position is not in your desired field, and you plan to move on as soon as you find a job that is a better match for your abilities. Or maybe you know you’re planning to move to a new city within a few months. Regardless of why you don’t plan to stay at a job over the long term, you will have to decide whether or not to participate in the company 401(k) plan. Here’s how to decide whether to save in the 401(k) if you know you will be leaving soon.
Understand what you can take with you after you leave. Some short-term workers are concerned about opening a 401(k) because they don’t want to lose money when they change employers. However, any money you contribute to a 401(k) is yours. When you leave your job, you can choose to roll the 401(k) into an individual retirement account or a new employer’s 401(k) plan, or you can leave it where it is to grow over time.
However, you may not get to take all of the money an employer contributes to your 401(k) with you. Some employers match a proportion of your 401(k) contributions or put a percentage of your annual salary into the account. You don’t get to keep the employer contributions until you are vested in the account. You may not be fully vested in these contributions for a few months or even years. This means that the employer will keep all or part of the company contributions to your 401(k) if you leave the job before you’re fully vested.
Ask about employer contributions and vesting. Find out whether your employer will contribute to your 401(k) account and if you will be vested before you plan to leave. It’s seldom a good idea to pass up additional compensation. So, if your employer will match up to 5 percent of your salary in 401(k) contributions, you will probably want to put at least 5 percent of your salary into your 401(k) so you can get the full match.
However, if the employer has a vesting schedule, those matching funds may not actually belong to you for several months or years. If you know you’ll be walking out the door in six months, but you won’t be vested in your 401(k) for a year, then you’re not really passing up the employer contributions by not investing in your 401(k). However, if you aren’t sure when you will leave and are simply hoping a better job opportunity will come along, you don’t want to miss out on matching funds you could have gotten.
Some employers have partial vesting schemes. For instance, you might be 25 percent vested right away, 50 percent vested after two years and 100 percent vested after five years. In this case, if your employer puts $1,000 into your 401(k) during your six months with the company, you’ll take $250 of that with you when you leave. Vesting schemes vary by employer, so it’s important to have a good grasp of your company’s plan before making your 401(k) decision.
If it’s likely you won’t be vested at all before you leave your position, or if your employer doesn’t offer matching incentives, there are other savings options beyond the 401(k). A traditional IRA offers the same tax-deferral benefits as a 401(k) plan, except that the contribution limit is lower. Or you could set yourself up for tax-free distributions in retirement by saving in a Roth IRA.
Know how likely you are to leave. You may think a job is temporary, but wind up staying for years longer than you planned. If you stay at the job for longer than you expected to, but wait until you’ve been there a year or more to open a 401(k), you may miss out on employer contributions and growth potential.
If there’s a possibility that your temporary position will turn permanent, think twice about passing up the opportunity to contribute to a 401(k). While you could open and contribute to a traditional or Roth IRA, contributing to a 401(k) from the start will ensure you don’t miss out on any employer contributions if you do wind up staying with the company longer than expected.
On the other hand, if you know for certain that your job is a temporary assignment and you already have something else lined up, you might want to stick with contributing to an IRA for that time period. Rolling over a 401(k) isn’t difficult, but it may be a hassle you don’t want to encounter for a small amount of savings.
A company 401(k) plan provides the ability to defer taxes on part of your income, and you always get to keep the amount you contribute to the account. So, you aren’t likely to come out behind by saving in a 401(k) account. However, make sure you understand the employer match and vesting schedule when contributing to a retirement account at a short-term job.