By Anna-Louise Jackson / NerdWallet
Some inmates spend the day looking for coffee. Others put in their hands something even hotter: theirs primer 401 (k).
Not long ago, getting a practice that really paid off might seem like a novelty. But recent studies by the National Association of Colleges and Entrepreneurs have found that among undergraduate college students, paid internships are increasingly the norm and that at least half of employers report offering 401 (k) plans to its inmates.
If you’ve got a practice that includes a 401 (k), here are three things you need to know.
It’s not too early to think about retirement
During internships, retirement planning is probably not one of your top priorities, and it’s understandable. That said, it’s never too early to start thinking about your future. A 401 (k) is a savings and investment plan that companies offer to their employees. It offers savings tax incentives and serves as the main nest egg for many American retirees. (New to all this? Learn more about the different benefits of a 401 (k).)
When it comes to saving, time is the most valuable asset you will ever have. And the sooner you start saving for retirement, the more you will have once the time comes. For example, if you only spent $ 1,000 at age 20 and didn’t touch that money again, it would increase to more than $ 16,000 in your mid-60s, assuming an average annual return of about 6 percent. You can appreciate the interest on all this extra money.
Unfortunately, a one-time contribution will not even come close to reducing it when you save for retirement. That’s why you’ll need to open a 401 (k) – yes, even at age 20 – and implement a savings discipline that you’ll maintain and expand over time.
You should probably contribute
Even if more employers offer a 401 (k) to interns, you should still take a moment to appreciate the value of this benefit, especially if the company will equal a portion of your contributions. This means that your employer adds money to your 401 (k) along with you, up to a certain limit. Unfortunately, this is not yet a universal benefit for all American workers.
So you have the internship and you have the 401 (k) – time to start contributing, right? The likely answer is yes, as long as you can afford to do so. While everyone’s personal financial situation is unique, here are a couple of things you should keep in mind when deciding if you want to fund a 401 (k) during an internship:
- You should not borrow to save for retirement. Saving for the future is essential, but it should not come at the expense of your current financial situation. Make sure you have a good understanding of what your monthly expenses will be during your internship (especially if you have moved). Don’t contribute to this 401 (k) if it means you’re accumulating high-interest credit card debts, for example, or giving up creating an emergency fund. If you are now too aggressive saving for retirement, dropping into your retirement account later often carries a heavy tax penalty.
- This practice will not last forever. Internships are temporary, so you’ll need to keep in mind what’s on the horizon. If you are still in school, you will need to consider whether the extra money you have is better spent on retirement or paying for future school-related expenses. And the right answer may be to balance the two goals. In the meantime, if you’ve finished school but still don’t have a full-time job lined up, you may want to be more conservative when it comes to saving for retirement instead of filling that emergency fund.
Once you have resolved the question of whether or not you should contribute, you will need to address another: What is the correct amount? If your employer matches a portion of your contributions, that’s free money, so one goal might be to contribute enough to capture that entire item. But again, don’t be too aggressive with your 401 (k) contributions, lest they cause you other short-term financial problems.
- Shred numbers: How much should I contribute to a 401 (k)?
You must bring your 401 (k) with you
On the last day of the internship, you will bring the belongings when you leave. Plan to do the same with your 401 (k). The difference is that you will want to turn it into an IRA, and the sooner the better. There are no dog tricks here: in the world of retirement, a “rollover” means moving money from one type of account with tax advantages to another.
An IRA, or individual retirement account, is similar to a 401 (k) in that it offers people tax exemptions to save for retirement. But IRAs also tend to include a wider range of investments to choose from and generally lower rates than employer-sponsored plans. However, you have other options:
- You could transfer this internship 401 (k) to your next employer’s 401 (k) plan. But do it only if you find low costs and satisfactory investment options.
- You can leave the money in your 401 (k) practices. The downside is that you won’t be able to contribute to it in the future and you no longer have a human resources team to help you with questions.
- You could charge it. But seriously: no. You are risking significant tax penalties and it will cost you a valuable advantage to save for the future. This option is almost never worth it.
In general terms, an IRA is the best option because of the advantages mentioned above. Review NerdWallet’s choices for the best IRA providers for change.
More from NerdWallet:
- 401 (k) calculator.
- How to set up your 401 (k)
- New graduates, do not postpone and lose your employer’s 401 (k)
Anna-Louise Jackson is a NerdWallet writer. Email: ajackson@nerdwallet.com. Twitter: @ aljax7.
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