We All Love Free Money Part Duex

In my grandparents’ generation when you started working for a company you generally stayed with that company until you retired.  In my generation, generation Y, statics has shown that we change jobs every two to three years.  There is nothing wrong with changing jobs, but if you establish a retirement plan with each company, what do you do with it? Keep it there? Cash out? This post will help you understand your options.

There are multiple retirement plans out there; however, for this post I will focus on the most common, 401(k) plans.  Keep in mind, each type of retirement plan has specific rules and guidelines tailored towards that plan.   

Vesting Schedule

When you contribute to your retirement plan your contributions are 100% vested.  This means if you decided to switch jobs you can take 100% of your contributions with you.  However, this may be different from your employer’s contributions. 

While some employers may offer immediate 100% vesting of their matching contributions to your retirement plan, often their contributions are restricted to a vesting schedule that is determined by the length of time you have been employed.   

There are two type of vesting schedules: graded vesting and cliff vesting

Graded Vesting:

• After one year of service: 0% vested
• After two years of service: 20% vested
• After three years of service: 40% vested
• After four years of service: 60% vested
• After five years of service: 80% vested
• After six or more years of service: 100% vested

(Example of graded vesting schedule)

With a graded vesting schedule, if you choose to leave your company after three years of service, you will be able to take 100% of your contributions and 40% of your employer’s contributions.  To put this schedule with numbers – if your employer contributed $5,000 (over three years) into your retirement plan, you will be able to take $2,000 with you if you were to leave the company.

Cliff Vesting:

• After one year of service: 0% vested
• After two years of service: 0% vested
• After three or more years of service: 100% vested

(Example of cliff vesting schedule)

With a cliff vesting schedule, if you choose to leave your company before three years, you will be able to take 100% of your contributions and 0% of your employer’s contributions.  

Portability

A great feature of the 401(k) plan is the portability feature.  Here are three choices:

• You may be able to roll your money into your new employer’s plan

• If you have $5,000 or more in your account, you may have the option of leaving the money in your (old) employer’s plan

• You can set up an Individual Retirement Account (IRA) with your bank, a broker, or with a mutual fund company

The bottom line - when you start a new job learn about your options specifically dealing with your retirement plan.  Making a hasty decision to leave your job could cost more than you think.  You do not want to leave money on the table.

Have you switched companies recently?  What was your experience with transferring your retirement plan?

Check out my previous post: We All Love Free Money!

Stay blessed!

Rianka D.