3 Rules You Need to Know About 401ks Before You Change Jobs

by : Steve Kroening

People are bouncing from job to job a lot more than they used to. It's uncommon to find someone who has stayed with a company for more than five years. That means a lot more people have to deal with 401k issues than ever before. If you want to make the most of your 401k when you switch jobs, make sure you follow these rules:

Rule #1 -- Never cash out your 401k just because you're changing companies.

Did you know that almost 90% of the people who change jobs cash out their retirement account? That's a ton of wasted money! When you cash out a retirement account, you have to pay taxes on it. You also have to pay early withdrawal fees. So you lose almost 40% of your hard-earned money. If you have $10,000 in your account, you'll get a check for about $6,000. That hurts!

Rule #2 -- Have the money transferred to an IRA

Instead of cashing out your 401k, simply have it transferred to an IRA. Just tell your company where you want it transferred and they'll take care of it. They may have some paperwork for you to fill out. But it's pretty simple. Never take a check directly from your company. If you do, you'll have to pay the taxes and fees -- even if you deposit it directly into an IRA.

Some people suggest leaving your money in the plan if you work for a large company. The thinking is that these are less likely to go out of business. But, as we saw with Enron, that's not always true. I recommend you move the money when you leave -- regardless of the company's size. It makes for a clean break and you don't have to worry about the company's solvency.

Rule #3 -- If you work for a small company, watch your account closely.

Consumer advocate Clark Howard warns: "If you have a 401k plan at a small business, keep your eyes and ears open. Watch how quickly your paycheck money is going into your account while you're working there. If your account doesn't go up when you get a deposit slip, it's time to think about moving on and moving your money. That means the company is withholding 401k money to stay afloat. Think about stopping your contributions, something I don't recommend often. And get the money into an IRA immediately."

Saving for retirement should be one of your highest financial priorities, just below giving, taking care of needs (food, clothing, shelter, etc.), certain insurance requirements, and paying off debt. You can be a good steward of these accounts just by following these simple rules.