Job-hopping is a fairly common practice today, especially since the employment market is healthy and strong. If you’ve been with the same employer for quite some time, you may be inclined to pick up and explore opportunities elsewhere. But before you go that route, you’ll need to make sure it doesn’t hurt you financially — especially with regard to your 401(k).
Are you fully vested in your 401(k)?
The money you contribute out of your paycheck to your 401(k) is yours to keep, regardless of how long you stay with your company. But if your employer supplies matching dollars, you may not get to take some or all of that money with you if you depart at the wrong time.
To know whether you’ll encounter an issue with keeping those matching funds, you’ll need to review your company’s 401(k) vesting schedule. Not all employer plans have a vesting schedule, but if yours does, you may want to time your departure around it.
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The purpose of a vesting schedule is essentially to prevent employees from snagging free money and then running away with it. If your company puts money into your 401(k) as a means of investing in you, and you leave two months later, that’s a pretty bum deal for your employer. Vesting schedules, however, can prevent employers from getting burned.
There are two common types of vesting setups your 401(k) might be subject to: cliff vesting and graded vesting. Cliff vesting restricts you from gaining ownership of your employer matching dollars until you’ve been with the company for a certain amount of time. If, for example, you’re only entitled to your match after three years of employment, you’ll get nothing if you resign after two and a half years.
Graded vesting, meanwhile, gives you increased ownership of your matched funds over a preset period of time. If you have a five-year graded vesting schedule and you leave your company after four years, you’ll get 80% of the matching dollars your employer put in.
Don’t give up that money
Knowing how your vesting schedule works could prevent you from forgoing money you may be close to getting to keep. Imagine you have a cliff vesting system that requires you to stay with your company for three years. If, after two years and eight months, you grow unhappy at work and decide that you’re ready to leave, you might push yourself to stay put for another four months if doing so means getting to hang onto the money your employer put into your 401(k).
You might make a similar decision with a graded vested schedule, too. If, for example, you’re four and a half years into a five-year schedule, you might stay on board those extra six months to claim your match in full.
Of course, in some cases, staying on board for longer to claim a match won’t make sense. If you’re offered a generous signing bonus to start a new job immediately, and that sum well exceeds the amount your employer put into your 401(k), then you’re better off taking the higher payout and giving up the money in your retirement plan. Similarly, if you’re offered the chance to land your dream job, and you know that passing it up will mean that you may never get a similar offer again, then it may be worth it to give up that match. The key, however, is to know what your vesting schedule looks like, and work around it when possible to avoid losing out on money that could otherwise come in very handy during retirement.