How to Spot the Best 401(k) While Job Hunting?

Any 401(k) can help you save for retirement. A great 401(k) allows you to save a lot.

The difference between an average plan and a great plan could add up to thousands of dollars more in retirement money in the future. Plus, the quality of a 401(k) can show how serious a company is about attracting and retaining good employees.

That doesn’t mean you should quit or turn down a job if it doesn’t offer a great 401(k). But knowing how to locate the best retirement plan in your category can help you evaluate job offers.

Here are three features of great 401(k)s.

A Great 401(k) Doesn’t Make You Wait To Start Saving

A good 401(k) comes with a company match, low-cost investment options, and low fees. A great 401(k) doesn’t make you wait to take advantage of those features.

Many plans now allow participants to start contributing immediately without any waiting period. Others have a waiting period of one to six months. Some are required to wait a full year — the maximum allowed under federal law — and that delay can be costly for workers.

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Let’s say you are 25 years old, earn $50,000 per year and are able to contribute 10% of your salary. The $5,000 you can’t contribute in the first year, plus a typical $1,500 match that you won’t earn, can mean that your retirement account will have about $106,000 less by age 65, a 7% average annual Assuming returns.

If you change jobs in the future – as you almost certainly will – each waiting period you encounter can add to the damage.

A Great 401(k) Lets You Keep Matches

Plans offer several different matching formulas, with some of the most common being 50% of the first 6% of earnings and 100% of the first 3% to 6% of salary.

The more generous the match, the better it is for the participants – up to a point. Many plans have a longer tenure period for employer contributions. For example, you may not have rights to any matching funds unless you have worked for the company for three years. After reaching the three-year mark, you will own 100% of any matches you earn and 100% of any future matches.

Another common approach is a six-year “graded” vesting schedule. You may have to work two years before you can get 20% of the match. You will get another 20% after each year of service, unless you have invested 100% in past and future matches after six years.

But longer vests have come under fire because of their negative impact on today’s more mobile workforce. A 2016 report from the U.S. Government Accountability Office found that if an employee leaves two jobs before vesting at age 20 and 40, the match they lose at retirement could amount to $81,743.

An increasing number of plans give employees immediate ownership of matching funds — 44.2% in 2021, up from 38.5% in 2017, according to Hattie Greenen, director of research and communications for the Plan Sponsor Council of America.

You are always 100% vested in your contributions, but it’s important to understand any restrictions your employer may place on contributions — and perhaps push for a shorter vesting period.

A Great 401(k) Gives You More Ways to Save

Most plans today offer Roth 401(k) options that allow participants to withdraw money that will not be taxed in retirement.

Contributions to a regular, pre-tax 401(k) give you an upfront tax break, but withdrawals are taxed as income. Contributions to a Roth 401(k) do not reduce your current tax bill, but withdrawals in retirement are tax-free. Financial planners often suggest that clients have money in both pre-tax and tax-exempt accounts to better manage their tax bill in retirement.

The IRS limits pre-tax and Roth 401(k) contributions to $20,500 in 2022 for those under 50 and $27,000 for those 50 and older. But the total contribution — by participants and their employers — can be up to $61,000 for those under 50, or up to $67,500 for those 50 and older, if the plan allows it.

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Some plans offer the option of making additional, after-tax contributions, which can help you put a lot of money into your retirement plan.

Let’s say you’re under 50 and you’ve maxed out your pre-tax contributions. Your company contributes $6,000 of the total $26,500. If your plan allows, you can contribute as much as $34,500 to the after-tax option to meet the joint employer and participant contribution allowance.

Money in after-tax accounts can be tax-deferred, which is a nice benefit, but some plans offer something even better: “in plan” conversions that let you quickly transfer money to Roth accounts while reducing potential tax bills. allow to transfer. This combination of after-tax contributions with conversion is known as a “mega-backdoor Roth,” and can be mega-helpful in accumulating future tax-free money.

This column was provided by personal finance site NerdWallet to the Associated Press. The content is for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner, and the author of “Your Credit Score.”

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