Common 401(k) Mistakes to Avoid When You Leave a Job

The average American changes jobs 12 times during their career, and at any given time, millions are actively seeking new employment. The next time you plan to take a new job, add one thing to the list of logistical decisions you'll need to make: How to handle your 401(k).

One of the best ways to make good decisions regarding your 401(k) is to become familiar with the most common mistakes other people make -- and sidestep them.

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Not waiting until you're fully vested (if possible)

Many employer-sponsored retirement plans have a vesting schedule that applies to employer matching contributions. Let's say you earn $100,000 annually, and work for a company that matches 4% of your annual 401(k) contributions. As long as you contribute at least 4%, the company adds an extra $4,000 to the account each year.

However, whether you receive the money your company added to the pot depends on how long you stay with the company and whether you're fully vested. Let's say your company's retirement plan requires you to stay for five years to be vested. Leaving before you're vested means you'll likely forfeit any non-vested account balance.

If you're close to being fully vested, consider whether it makes sense to work there a while longer to avoid leaving money on the table.

Taking a break

When you switch jobs, it's important to begin contributing to your new employer's retirement plan as soon as you're eligible. For some companies, that's right away; for others, you have to wait months.

Here's the issue: If you do have to wait, you may really enjoy how plump your paychecks are without 401(k) contributions. However, getting used to larger checks is never a good idea, as it makes it that much harder to return to regular contributions.

If your company requires you to wait before contributing, the workaround is to immediately take the amount you would have contributed from your paycheck and deposit it into an easy-to-access emergency fund, like a money market fund or CD ladder. The goal is to have enough money put away in a cash account to carry you through times when the market nosedives during your retirement years.

Taking the "indirect" route

Most companies allow you to leave your 401(k) plan right where it is if you'd like. However, if you decide to roll the money over to your new employer's retirement plan, there are two ways to accomplish the task.

You can (and likely should) request a "direct" rollover. A direct rollover is when the administrator of your old plan transfers funds to the administrator of your new plan. You don't play middleman, and you don't worry about getting into trouble.

With an "indirect" rollover, the administrator of your old plan withholds a mandatory 20% (for taxes), and the remainder is sent to you. You have 60 days to deposit the funds into a new retirement plan. If you fail to deposit those funds within 60 days, the 20% withheld by your former plan administrator is treated as taxable income.

Even if the funds are deposited within 60 days, you must make the account whole by replacing the 20% that was withheld to avoid taxes and penalties.

Sometimes, the best way to stay out of trouble is to watch what tripped other people up. When it comes to 401(k)s, you have plenty of other people's mistakes to choose from.

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