Eight things to know about joining your 401(k)

1 Know when you're eligible

Some retirement plans have rules about when you can join. For example, your employer may require you to be at least 21 years old and have been working at the company for one year. Other companies may let you join immediately. Check your plan rules, so you know when you can start saving. You can find the details in your plan’s summary plan description (SPD).

2 Review contribution limits

Your contribution limit doesn’t vary by company. It depends on the plan type. For example, a 401(k) has different limits than a SIMPLE IRA. The IRS sets annual limits that can change each year. Stay up to date on the limits to maximize how much you’re saving toward retirement. 

3 Combine retirement accounts

If you have retirement accounts from a former job, consider combining—or rolling over—those accounts into your new one.¹ The benefits may include:

• Potentially lower administrative fees
• Easier to manage all your retirement savings in one place
• Potentially fewer required minimum distribition calculations when you retire
• Simplify estate management for your beneficiaries when you pass away

Check your plan’s SPD to understand any restrictions—not all plans accept rollovers from other retirement accounts.

4 Choose to save pretax or after-tax

Now that you know how much you can save, you need to think about whether you want to save before or after paying taxes. All plans let you make pretax contributions, but some also let you make Roth (after-tax) contributions. Your decision to choose traditional, Roth, or both contribution types depends on your taxable income today and your expected taxable income in retirement.

Traditional (pretax) contributions—You don’t pay taxes on the money you save today, but you pay income taxes on 100% of your withdrawals in retirement (including any investment gains).

Roth (after-tax) contributions—You pay taxes on contributions now, but 100% of your withdrawals are tax free in retirement (including any investment gains) if you meet certain conditions.

5 Take advantage of company matching contributions

If your employer matches your contributions, try to contribute at least enough to get the full match. Turning this down is like turning down part of your pay. For example, your company matches 100% of the first 3% you save, plus 50% of the next 2%. If your salary is $52,000 and you save $100 per biweekly paycheck, your employer will add $80 to your account. 

Some company matching contributions have eligibility requirements, such as a waiting period. Check your SPD to see if you qualify. 

6 Learn the vesting schedule

Any money you save is always yours. Contributions that your employer makes, however, become yours over time based on the plan’s vesting schedule. If you leave before you’re 100% (fully) vested, you may receive only a portion or none of your employer’s contributions. The SPD outlines the vesting schedule.

There are three types of vesting schedules:

Immediate vesting—You own 100% of employer contributions as soon as you receive them.

Graded vesting—Your ownership increases gradually after each work anniversary. Here’s an example of the strictest possible schedule:

For example, if your company uses the graded vesting schedule outlined above and you leave the company after 3.5 years, you’ll own 40% of your company’s matching contributions. The other 60% is forfeited. 

Cliff vesting—You go from 0% to 100% vested all at once, not gradually after a set number of years. Here’s an example of the strictest possible schedule:

For example, if your company uses the cliff vesting schedule outlined above and you leave the company after 3.5 years, you’ll own 100% of your company’s matching contributions.

7 Understand investment and advice options

Take some time to review your investment options. Research each investment’s objectives, historical performance, and manager’s track record. A mix of investments can help you manage your risk and build your savings over the long term. 

If you don’t want to manage your investments yourself, many plans offer investment advice services. Check your plan’s website or ask your plan administrator to see if that’s an option for you and what it costs.

8 Find out about loans and hardship withdrawals

Your retirement savings are meant to fund your retirement, but sometimes life throws you a curveball, and you need money to cover an emergency expense. Review your plan’s SPD to see if you can take a loan or hardship withdrawal—it’s good to know your options. Not all retirement plans offer these options to encourage you to keep your savings invested for retirement.

Congratulations on taking the first step

Workplace retirement plans are a great way to save for your retirement. These eight things can help you understand how your plan works and what to expect when you join. You can find many answers in the same place—your plan’s SPD. Go through it, highlight the main points, and keep it somewhere you can easily reference.