401(k) Explained: Everything You Need to Know Before Your Next Job
Changing jobs? Learn how to manage your 401(k), make the most of employer matches, and keep your retirement savings on track.
Starting a new job often comes with a flood of paperwork, new names to learn, and a handful of financial decisions to make. Somewhere in that mix, you’ll probably hear about a 401(k). A key part of your future financial security that’s worth paying attention to from day one.
Whether it’s your first job or a new opportunity, understanding how a 401(k) works and what to do with any old 401(k)s from past jobs can make a real difference in your retirement readiness. Rolling over old accounts into your new plan or a consolidated IRA can help you keep all your savings in one place, making it easier to track growth, stay on top of contributions, and feel confident about your financial future.
So, what exactly is a 401(k)?
A 401(k) is a retirement savings plan offered by employers that lets you set aside part of your paycheck to save and invest for the future. The money you contribute comes out of your paycheck automatically (often before taxes) into the plan, and your money can grow over time through investments such as stocks, bonds, or mutual funds.
There are two main types of 401(k)s:
- Traditional 401(k): You contribute money before taxes are taken out, which can lower your taxable income today. You’ll pay taxes later when you withdraw the money in retirement.
- Roth 401(k): You contribute after taxes are taken out, meaning you won’t get a tax break now but your withdrawals in retirement are tax-free.
Why your 401(k) matters (even if retirement feels far away)
It might seem strange to think about retirement when you’re still climbing the career ladder or just settling into a new role. But starting early has one big advantage: compound interest.
That’s a fancy way of saying your money earns returns, and then those returns can earn their own returns. Over time, even small contributions can grow into something substantial.
Here’s a simple example:
If you put $200 a month into your 401(k) starting at age 25 and your investments grow at an average of 7% a year, you could have around $480,000 by the time you’re 65. Wait until 35 to start, and you’d have about $240,000. That’s half the amount, just for starting ten years later.
So yes, those small paycheck deductions now can make a huge difference later.
The perk you don’t want to miss: employer matching
One of the biggest advantages of having a 401(k) through work is the employer match.
Many companies will match a portion of what you contribute. For example, some employers match around 50% of what you contribute, up to 6% of your pay. Others might offer a dollar-for-dollar match or a tiered structure that rewards higher contributions. Either way, it’s essentially extra money added to your retirement account just for participating.
If your employer offers a match, do your best to contribute enough to get the full amount. Otherwise, you’re leaving money on the table.
How your 401(k) works while you’re employed
Once you’re enrolled, contributions are automatically deducted from your paycheck and invested based on your chosen options. You’ll typically be able to select from a mix of mutual funds like stocks, bonds, and target-date funds, depending on how comfortable you are with risk and how far you are from retirement.
Your 401(k) is your money, but it’s meant to stay invested for the long haul. You generally can’t take it out before age 59½ without paying a penalty (though there are a few exceptions).
Since your contributions are deducted automatically, your savings grow quietly in the background while you focus on your career.
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Get startedWhat happens to your 401(k) when you change jobs?
If you’ve already built up a 401(k) at a previous job, you’re not alone. It’s one of the most common questions people have when switching employers. The good news is that your 401(k) is yours to keep, even if you leave your job.
Here are your main options:
1. Leave it with your old employer
Some plans let you keep your money where it is. It’ll stay invested and continue to grow, but you won’t be able to contribute anymore. This might make sense if your old plan has great investment options or low fees. But keep in mind, it can be easy to lose track of old accounts as you move through jobs.
2. Roll it into your new employer’s 401(k)
If your new job offers a 401(k) and accepts rollovers, this can help you consolidate your savings into one place. Managing one account is simpler, and you’ll keep your savings growing tax-deferred.
3. Roll it over into an IRA
If you want more investment flexibility, you can roll your old 401(k) into an Individual Retirement Account (IRA). IRAs often offer more choices for how your money is invested and sometimes lower fees than employer plans.
Many people choose this route when they change jobs because it gives them more control over their retirement money.
4. Cash it out (may come with penalties)
You technically can withdraw your 401(k) balance, but experts say it is best to avoid unless it’s necessary. Cashing out before age 59½ usually means you’ll owe income taxes and a 10% early withdrawal penalty. Plus, you’ll lose out on future growth, which can cost you significantly in the long run.
A few important things to check before your next job
When you’re reviewing your new job offer, it’s worth asking a few questions about the company’s 401(k) plan:
- When can I start contributing? Some employers let you join right away; others may have a waiting period.
- Does the company offer a match? If so, find out how much they match and whether it’s based on a percentage of your salary.
- When do I become fully vested? Vesting refers to when the employer’s contributions (the match) officially become yours. Some companies require you to work a certain number of years before you keep those matched funds.
- What investment options are available? Check whether the plan offers a Target Date Fund which adjusts your investments over time to grow when you’re young and reduce risk as you age.
- Can I make Roth contributions? Having the option for both Traditional and Roth 401(k) contributions gives you more flexibility for the future.
Why rolling over your old 401(k)s matters
A 401(k) is one of the easiest and most effective ways to build a comfortable retirement. Whether you’re just starting a new job or moving on to the next one, understanding how it works and what to do with your savings along the way can make all the difference.
Here’s what to remember:
- Contribute early and consistently (especially enough to get any employer match).
- Keep your old 401(k)s organized. Roll them over when it makes sense.
- Check your investment mix from time to time to stay on track.
Your 401(k) might not seem like a big deal when you’re focused on your next role or your next project, but years from now, you’ll be glad you made it a priority. Each contribution is a small step toward financial freedom, one paycheck at a time.
Make Your 401(k) Rollover Simple with PensionBee
If you’ve worked for a few companies, chances are you’ve got multiple 401(k)s sitting around. With Americans averaging 12 job changes, that adds up to over 30 million forgotten accounts.
Consolidating them can help you:
- Keep better track of your total savings
- Reduce paperwork and account fees
- Simplify your investment strategy
- Make it easier to manage withdrawals when you retire
That’s where PensionBee comes in. We help make it simple to rollover your old 401(k)s and IRAs into one account, giving you a clear view of your savings. Many rollovers happen automatically, but if yours requires extra attention, our personal rollover managers, called BeeKeepers, are ready to guide you every step of the way. With expert management and diversified portfolios powered by ETFs like SPY and MDY from State Street Investment Management, one of the world’s largest asset managers.
