Intern With a 401(k)? Here's How to Make It Pay

Some interns spend their days fetching coffee. Others get their hands on something even hotter: their first 401(k).

Not so long ago, scoring an internship that actually paid might have seemed novel. But recent studies by the National Association of Colleges and Employers have found that among graduating college seniors, paid internships are increasingly the norm, and that at least half of employers report offering 401(k) plans to their interns.

If you scored an internship that comes with a 401(k), here are three things you need to know.

1. It’s not too early to think about retirement

During an internship, planning for retirement probably isn’t one of your top priorities — and understandably so. That said, it’s never too early to begin thinking about your future. A 401(k) is a savings and investing plan offered by companies to their employees. It offers tax breaks that encourage saving, and serves as the primary nest egg for many American retirees. (New to all this? Learn more about the various perks a 401(k) offers.)

When it comes to saving, time is the most valuable asset you’ll ever have. And the earlier you begin saving for retirement, the more you’ll have once that time comes. For example, if you were to set aside just $1,000 at the age of 20 and never touched that money again, it would balloon to more than $16,000 by your mid-60s, assuming an annual average return of about 6%. You can thank compound interest for all that extra money.

Unfortunately, a one-time contribution won’t come even close to cutting it when saving for retirement. That’s why you’ll need to open a 401(k) — yes, even in your 20s — and kick-start a discipline of saving that you’ll maintain and build upon over time.

2. You should contribute — probably

Even if more employers are offering a 401(k) to interns, you still should take a moment to appreciate the value of this perk — especially if the company will match some portion of your contributions. What that means is your employer adds money to your 401(k) along with you, up to a certain limit. Unfortunately, this still isn’t a universal benefit for all American workers.

So you’ve got the internship and you’ve got the 401(k) — time to start contributing, right? The likely answer is yes — so long as you can afford to do so. While everyone’s personal financial situation is unique, here are a couple of things you should consider when deciding whether to fund a 401(k) during an internship:

• You shouldn’t go into debt to save for retirement. Saving for the future is essential, but it shouldn’t come at the expense of your present financial situation. Make sure you have a good understanding of what your monthly expenses will be during your internship (especially if you’ve relocated). Don’t contribute to that 401(k) if it means you’ll amass high-interest credit card debt, for example, or forgo building an emergency fund. If you’re too aggressive saving now for retirement, dipping into your retirement account later often incurs a hefty tax penalty.
• This internship won’t last forever. An internship is temporary, so you’ll need to consider what’s next on the horizon. If you’re still in school, you’ll need to weigh whether any extra money you have is better put toward retirement or paying for future school-related expenses. And the right answer may be to balance the two goals. Meanwhile, if you’ve finished up school but don’t have a full-time job lined up yet, you may want to be more conservative about saving for retirement in lieu of padding that emergency fund.

Once you’ve sorted through the question of should-I-or-shouldn’t-I contribute, you’ll need to tackle another: What’s the right amount? If your employer matches some portion of your contributions, that is free money, so a goal might be to contribute enough to capture all of that match. But again, don’t be too aggressive with your 401(k) contributions, lest they cause you other financial woes in the short term.

» Crunch the numbers: How much should I contribute to a 401(k)?

3. You should take your 401(k) with you

On the last day of your internship, you’ll take any belongings when you leave. Plan to do the same with your 401(k). The difference is you’ll want to roll that over into an IRA — and the sooner, the better. No dog tricks here — in the retirement world a “rollover” means moving money from one type of tax-advantaged account to another.

An IRA, or individual retirement account, is similar to a 401(k) in that it offers people tax breaks for saving toward retirement. But IRAs also typically include a broader array of investments to choose from and generally lower fees than employer-sponsored plans. You do have other options, however:

• You could roll over that internship-era 401(k) into your next employer’s 401(k) plan. But do this only if you find low costs and satisfactory investment choices.
• You could leave the money in your old 401(k). Downsides here are you won’t be able to contribute to it in the future, and you may no longer have an HR team to assist with questions.
• You could cash it out. But seriously: Don’t. You’re risking significant tax penalties and costing yourself a valuable head start on saving for the future. This option is virtually never worth it.

Generally speaking, an IRA is the best option because of the perks mentioned above. Review NerdWallet’s picks for the best IRA providers for rollovers.

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