Why You Should Open a 401(K) for a Short-Term Job
If you’re taking a short-term job, you may be wondering whether opening a 401(k) retirement account is worth the effort. After all, you don’t plan to stay here long, and the thought of leaving that money behind when you move on to the next opportunity can be unsettling. However, there are good reasons why you should consider participating in a 401(k) plan, even if your tenure in the role is short.
The money is yours, no matter what
One of the biggest misconceptions about 401(k) accounts is that the money belongs to your employer. This is very far from the truth. Any contributions you make to your 401(k) plan are yours, and you can take them with you when you leave your job. When you move on, you have several options:
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Rollover your 401(k) into an individual retirement account (IRA). This allows you to consolidate your retirement savings into one account, making it easier to manage and track your investments.
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Include your 401(k) in your new employer’s plan: If your new job offers a 401(k) plan, you can roll over your existing balance to the new account, keeping your retirement savings in one place.
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Leave your 401(k) to your former employer: While this option is available, it is generally not recommended. By leaving your 401(k) behind, you could face higher fees and limited investment options.
The importance of turning over
While it’s possible to leave your 401(k) with your former employer, it’s much better to roll it over when you leave your job. Many people forget about these small accounts and can rack up significant maintenance and account management fees over time. By rolling your 401(k) into an IRA or your new employer’s plan, you’ll avoid these fees and continue to grow your retirement savings.
One of our Lifehacker editors has had success consolidating her retirement accounts: She has an IRA that is essentially all of her old 401(k) plus her current 401(k). This simplified approach means she only has to worry about two accounts, making it easier to manage her retirement savings.
The power of compound interest
Even if your short-term job only allows you to contribute a modest amount to your 401(k), the power of compound interest can make a big difference over time. By starting to save early, even small savings can grow significantly due to the compounding effect of investment returns.
Tax benefits
The most obvious benefit of a 401(k) is the tax advantages it offers. Contributions to a traditional 401(k) are made from pre-tax dollars, which reduces your taxable income for the year. This can result in significant tax savings, especially if you are in a higher tax bracket.
So while short-term work may seem like an unlikely time to open a 401(k), the benefits from doing so can be significant. By taking advantage of tax benefits, the power of compound interest, and the ability to roll your savings into an IRA or new employer’s plan, you can ensure that your retirement savings will continue to grow, no matter how often you change jobs.