Should I contribute to a 401k with a vesting schedule?
I am looking for some advice as to how much I should contribute to a 401k.
I am considering taking a job at a place that has a worse 401k plan than I currently have - 6%, half matching. The plan has a vesting schedule for 5 years, 20% per year.
My base salary will be 130k.
If I start employment there, should I put money into that 401k from the start? For some background, I am 28, and I have never worked at a place yet that I stayed at for 5 full years. Are there better options for me to put my money into something else besides that plan?
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There's no one answer.
You need to weigh the fees and quality of investment options on the one side against the slowly vesting employer contribution and tax benefits of 401k contributions in excess of IRA limits.
My answer would be yes.
In addition, I'm not sure that anything requires you to roll your current 401(k) into a new one if you don't like the investment options. Keeping existing funds in your current 401(k) if you like their investment options might make sense for you (though they obviously wouldn't be adding funds once you're no longer an employee).
As for the terms of the potential new 401(k), the matching percentage and vesting schedule match what I've seen at past employers. My current employer offers the same terms, but there's no vesting schedule.
It's still tax-deferred savings, unless the fees are terrible it's going to be better than investments that aren't tax deferred.
Yes. Not doing so would be like turning down a raise. The best advice in almost every situation is to at least contribute up to the amount that the company will match so you get the full benefit.
One thing to clarify that you might not be understanding. The vesting period is only for the money the company matches, not your own investment. Even if you leave the company before the account is vested or fully vested, you can transfer to a 401k at your new employer, or roll over into an IRA, or take as taxable income (and pay a penalty if
it is an early withdrawal), all your contributions together with any investment gains or losses that have occurred. Ditto whatever part of your employer match that has vested
by the time you leave. Often, the employer matching contributions are invested in the
same funds in the same proportions that you have chosen for your own contributions and thus will have incurred the same gains or losses as your own contributions, but
what you are entitled to take with you is the part that has vested.
Also, you mention that it is unlikely that you will stay the entire 5 years. However, if you plan to at least stay a couple of years it makes sense to get the 20%, 40%, etc. of the match that you vest during your stay. Again, it's free money.
Math - The half-match is 3% or 00. After 5 years, ,500.
If you stay, you are vested, and have K (I hope it's actually far more) extra. For you, it's like 2 month's salary bonus after 5 years.
If you leave early, the good news is that even if the expenses within the plan weren't great, you have the money you put in, along with what vested so far. You move that to an IRA and choose your own thrifty funds or ETFs.
For me (as Duff said, there's no one answer, so to be clear, this is my feeling, or preference, not gospel) 6% is far too little to save as a percent of my income. So if the 401(k) fees ran say .8% or higher, I'd put in the 6% to get the potential match, and then save on the side.
Our answers might change slightly depending on the exact fees you're exposed to.
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