Why You Should Open a 401(k) at a Short-Term Job

Even if you're job-hopping, you should still be thinking about retirement.

If you're taking on a short-term job, you might be wondering whether it's worth the effort to open a 401(k) retirement account. After all, you're not planning to stick around for long, and the thought of leaving that money behind when you move on to your next opportunity can be unsettling. However, there are compelling reasons why you should consider contributing to a 401(k), even if your tenure at the job is brief.

The money is yours, no matter what

One of the biggest misconceptions about 401(k) accounts is that the money belongs to your employer. This couldn't be further from the truth. Any contributions you make to your 401(k) are yours, and you can take them with you when you leave the job. When you move on, you have a few options:

1. Roll your 401(k) into an Individual Retirement Account (IRA): This allows you to consolidate your retirement savings into a single account, making it easier to manage and track your investments.

2. Roll your 401(k) into your new employer's plan: If your new job offers a 401(k) plan, you can transfer your existing balance into the new account, keeping your retirement savings in one place.

3. Leave your 401(k) with your former employer: While this option is available, it's generally not recommended. By leaving your 401(k) behind, you may be subject to higher fees and have limited investment options.

The importance of rolling over

While leaving your 401(k) with your former employer is an option, it's much better to roll it over when you leave your job. Many people forget about these small accounts, and over time, they can accumulate significant fees for account maintenance and management. By rolling your 401(k) into an IRA or your new employer's plan, you'll avoid these fees and keep your retirement savings growing.

One of our Lifehacker editors found success in consolidating her retirement accounts: She has an IRA that essentially consists of all her old 401(k)s, plus her current 401(k). This streamlined approach means she only has two login accounts to worry about, making it easier to manage her retirement savings.

The power of compound interest

Even if your short-term job only allows you to contribute a modest amount to your 401(k), the power of compound interest can make a significant difference over time. By starting to save early, even small contributions can grow substantially, thanks to the compounding effect of investment returns.

Tax advantages

The most obvious perk of a 401(k) is the tax advantages it offers. Contributions to a traditional 401(k) are made with pre-tax dollars, reducing your taxable income for the year. This can result in significant tax savings, especially if you're in a higher tax bracket.

So while short-term jobs may seem like an unlikely time to open a 401(k), the benefits of doing so can be substantial. By taking advantage of the tax benefits, the power of compound interest, and the ability to roll your savings into an IRA or a new employer's plan, you can ensure that your retirement savings continue to grow, no matter how often you change jobs.