What Job Seekers Need to Know About 401(k) Plans

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401(k)s: What You Need to Know

What is a 401(k) plan?
Types of 401(k) plans
Employee matching and contribution limits
Options for your 401(k) when changing jobs
The bottom line

When evaluating job offers and negotiating compensation, understanding employee benefits is key — and few benefits are as important as a 401(k). This retirement savings vehicle plays a vital role in securing your financial future. In fact, roughly one-third of working-age Americans rely on a 401(k) for their retirement savings, while traditional pension plans have become increasingly rare. Let’s break down the basics of 401(k) plans so you can see how they fit into your long-term goals and why they’re worth your attention.

Named after a section of the U.S. Internal Revenue Code, a 401(k) plan allows you to set aside a portion of your salary and/or bonus on a tax-deferred basis. This money grows tax-free until you withdraw it, typically in retirement, at which point you'll usually pay taxes on the withdrawals. The main advantage of 401(k) plans over other retirement plans is their portability. You can usually take your funds with you if you change jobs. Also, many employers offer to match a portion of your contributions, essentially sweetening your pension pot.

Employers can offer various types of 401(k) plans to their employees:

1. Traditional 401(k) — This is the most common type. Contributions are made with pre-tax dollars, reducing your current taxable income. The money grows tax-deferred, and you pay taxes when you withdraw funds in retirement.

2. Roth 401(k) — Introduced in 2006, Roth 401(k)s have gained popularity. Contributions are made with after-tax dollars, so there's no immediate tax benefit. However, qualified withdrawals in retirement are tax-free, including any investment earnings.

3. SIMPLE 401(k) — These plans are designed for employees of small businesses with 100 or fewer employees. They typically have lower contribution limits for employees and mandatory employer contributions.

4. Safe Harbor 401(k) — These plans are designed to ensure fair treatment for all employees, regardless of their income level. They require employers to make mandatory contributions that belong to the employee immediately, without any waiting period.

It's worth noting that some employers offer both traditional and Roth 401(k) options. In such cases, you may be able to split your contributions between the two types, providing tax diversification in retirement.

The specifics of matching programs vary by employer, but here are some key points:

1. Matching formulas — A common matching formula is for the employer to contribute 50 cents for every dollar you contribute, up to a certain percentage of your salary. It’s been estimated that around four in ten companies offer 401(k) matching contributions of up to 6% of their employees' wages.

2. Vesting schedules — Vesting refers to the ownership of the funds in your 401(k) account. Your own contributions are always 100% yours, but employer contributions often come with a vesting schedule. This means that you gain ownership of the employer's contributions gradually over time. For example, you might become 20% vested after one year, 40% after two years, and so on until you're fully vested. If you leave the company before being fully vested, you may forfeit some or all of the employer's contributions.

3. Contribution limits — For 2024, the annual limit on employee contributions to a 401(k) is $23,000 for workers under age 50. Those 50 or older can make an additional $7,500 catch-up contribution.

4. Total contribution limits — There's also a limit on total employee and employer contributions. For 2024, this combined limit is $69,000 per year for workers under 50, or $76,500 if the catch-up contribution is included.

Taking full advantage of your employer's match, if offered, is generally recommended by financial advisors. It's essentially risk-free money that can significantly boost your retirement savings over time.

What should you do when you're really ready to say yes? Read The 7 Things You Should Do After Accepting a Job Offer.

When you leave a job where you've been contributing to a 401(k) plan, you typically have four options:

1. Leave the money in your former employer's plan. If your account balance is $7,000 or more, you can usually leave your money in your former employer's plan until you're ready to withdraw it. This option makes sense if you're satisfied with the plan's investment choices and management.

2. Roll over your 401(k) into an IRA. This option allows you to avoid immediate taxes and maintain the account's tax-advantaged status. It also typically provides a wider range of investment choices than an employer-sponsored plan.

3. Move your 401(k) to your new employer's plan. If your new employer allows it, you can roll over your old 401(k) into their plan. This maintains the account's tax-deferred status and avoids immediate taxes.

4. Withdraw the money. While possible, this is generally not recommended unless you urgently need the funds. You'll owe income tax on the withdrawal, plus a 10% early distribution penalty if you're under 59½ years old.

If you decide to roll over your 401(k), the funds must be re-deposited into a new retirement account within 60 days to avoid taxes and penalties.

Looking beyond benefits? Learn how to evaluate a company’s culture to ensure it’s the right fit for you.

401(k) plans are a powerful tool for retirement savings, offering tax advantages and potential employer-matching contributions.

Some key points to remember:

1. Contribute enough to take full advantage of any employer match, if offered.

2. Be aware of annual contribution limits and adjust your savings strategy accordingly.

3. When changing jobs, carefully consider your options for your existing 401(k) funds.

While this guide provides an overview, 401(k) plans can vary significantly between employers. Thoroughly review your specific plan documents and consider consulting with a financial advisor or tax professional for personalized advice. By taking the time to understand and optimize your 401(k) contributions, you're taking an important step toward securing your financial future.

Let Robert Half help you find a job that works for you.

*The above information is general information and is not intended to be financial advice. If you have questions regarding your individual 401(k) and/or retirement plans, please consult a financial advisor or tax professional.

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