Changing jobs often disrupts retirement plans, but you can stay on track with smart moves. Job-hopping has become normal these days, especially among younger workers who change positions every few years. While new jobs might bring higher pay, they can mess up your retirement savings if you’re not careful.
When you leave a job, you have choices about what to do with your 401(k). You can roll it into your new employer’s plan, move it to an IRA, leave it with your old employer, or cash it out. That last option is the most dangerous one.
“Cashing out retirement savings is one of the biggest mistakes people make when changing jobs,” says Mark Hamrick, senior economic analyst at Bankrate. “You’re essentially stealing from your future self.”
The penalties for early withdrawal are harsh. You’ll pay a 10% penalty if you’re under 59½, plus regular income taxes on the money. A $10,000 withdrawal could shrink to just $6,500 after these costs. Even worse, you lose all the growth that money could have earned over decades.
Instead of cashing out, consider rolling your old 401(k) into your new employer’s plan. This keeps your retirement money growing tax-deferred and makes it easier to track your savings in one place. If your new job doesn’t offer a retirement plan right away, open an IRA to hold your funds temporarily.
“The simpler you make your financial life, the more likely you are to stay engaged with it,” explains Catherine Collinson, CEO of Transamerica Institute. “Having too many scattered accounts often leads to neglect.”
Job changes also create a risk of savings gaps. If your new employer has a waiting period before you can join their 401(k), don’t use this as an excuse to stop saving. Set up automatic transfers to an IRA during this waiting period to maintain your savings momentum.
Another challenge comes when moving between different types of retirement plans. Government and nonprofit workers might have 403(b) or 457 plans instead of 401(k)s. These plans have different rules, so consult with a financial advisor before making any moves.
Remember to adjust your contribution rate at your new job. Many people forget this step and end up saving less than before. Try to contribute enough to get the full employer match at minimum – that’s free money you don’t want to miss.
“The employer match is the easiest investment return you’ll ever receive,” says Hamrick. “It’s an immediate 50% or 100% return depending on your company’s matching formula.”
If your new job pays more, consider increasing your retirement contributions instead of spending all the extra income. Financial advisors suggest saving 15% of your salary for retirement, including employer matches.
Keep track of old retirement accounts during your career moves. The U.S. Department of Labor estimates Americans leave billions in retirement accounts behind when changing jobs. Use the National Registry of Unclaimed Retirement Benefits to search for forgotten accounts.
Job changes also offer a chance to rethink your retirement strategy. When you’re setting up a new 401(k), review your investment choices carefully. Make sure your asset allocation still matches your age and risk tolerance.
For those over 50, job transitions present a special opportunity. You qualify for catch-up contributions that let you save an extra $7,500 in 401(k) plans above the regular limit. This helps make up for any savings gaps earlier in your career.
Finally, protect your emergency fund during job changes. Having 3-6 months of expenses saved separately from retirement accounts helps you avoid tapping retirement savings if you face unexpected costs between jobs.
Job changes are a normal part of modern careers. With careful planning, you can protect your retirement savings while moving up the career ladder. Your future self will thank you for staying on track.
