NEW YORK (AP) - Workers' 401(k) balances have never been bigger, thanks to continued contributions and a surging stock market. But many savers continue to make a mistake that's costing them thousands of dollars, if not more.
When workers leave their jobs, they have the choice of leaving their 401(k) accounts alone, rolling them over into another tax-deferred retirement account or cashing them out and pocketing the money. Last year, 35 percent of all participants who left their jobs cashed out their accounts, according to the nation's largest 401(k) provider, Fidelity Investments. That's up slightly from 32 percent in 2009.
The move provides some quick cash, but it's also likely the accountholder will have to pay penalties: Nearly everyone younger than 59 1/2 must pay 10 percent of their account balance as a penalty. Add on top of that the income taxes that come due, and the price tag quickly escalates.
The average balance of a 401(k) account that was cashed out last year was close to $16,000, Fidelity says. Of that, the typical person pocketed just $11,200 assuming 20 percent was withheld for taxes and the 10 percent penalty was assessed. But that's not the worst of it, says Jeanne Thompson, vice president at Fidelity Investments. It's the lost opportunity for the saver, who no longer gets the compounded growth the savings would have had in a retirement account.
Cash-outs are most prevalent among younger workers, the ones who would most benefit from keeping the money in a tax-deferred retirement account. They have the most years of possible compounded growth ahead of them before retirement. Among workers from 20 to 39 years of age who left their jobs last year, 41 percent cashed out their 401(k) balances.
"Many young people are struggling: They're paying off debt or trying to buy their first car or first home," Thompson says. But if they had kept the $16,000 invested, Fidelity says it could have grown big enough to provide nearly $500 per month in income during retirement.
To be sure, some younger workers don't have a choice. Some plans can automatically cash out a 401(k) balance when a worker leaves if it's below a certain amount, such as $5,000, and younger workers are more likely to be under that threshold.
Instead of cashing out, Thompson suggests savers consider leaving the money in their old employer's 401(k) plan, rolling it over to an individual retirement account or rolling it over to their new employer's 401(k) plan. Each option has its pluses and minuses: An IRA can offer more mutual fund choices, for example, but a 401(k) may offer access to share classes of funds with lower expense ratios than savers can get on their own.
The bull market means that workers may find their 401(k) account balances all the more tempting. At the end of last year, the average balance was $89,300, up 15.5 percent from a year earlier, according to Fidelity. The surging stock market fueled most of that growth: The Standard & Poor's 500 index returned 32.4 percent last year, including dividends. But contributions made by workers and their employers accounted for 22 percent of the growth.
For savers who have both IRA and 401(k) accounts with Fidelity, the company found that the average combined balance was $261,400 at the end of 2013, up 16 percent from a year earlier.
Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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~ Senator Barack H. Obama, March 2006
Most people aren't going to cash out their 401k just because they want to. I'd say in most cases they have to.
These people that cash out their 401-Ks do it because they are broke. The Middle Class is wiped out. Period. If the billionaires would have let American get a raise versus a lose of income from 2000 American workers would not have to tap their 401-Ks.
Here is the deal. Since 2000 the avereage American made approximately $55,000. Well 12 years later they are making in 2012 American average workers approximately $56,000. Whoa a whole $1000,000 or 2% more income than 12 years ago. That is becaise 95% of any income gains go to the Top 1%. So factor in other factors is that the cost of living has gone up at least 33% in those 12 years. Translation. The Middle Class is basically making 40% less and working at least twice if not 3 times as hard. We will not talk about Billionaires and Big Corporations removing themselves from the Tax Payer roles. We will not bring up the Banks took out 19,000,000 foreclosed homes etc.
Why spend $800 billion a year on defense when the greatest destruction to the American People are the Billionaires and the Congress that have wiped out the American Middle Class.
I am really really Tired of the massively greedy and evil Billionaires and their lap dog Congressmen that have destroyed the American Dream. Memebers of Congress and Billionaires are the "Face of Evil".
My wife and I (both 33) recently made the decision to cash out her 401k from her previous employer and use the funds to buy our 3rd investment/rental property. While long term could the funds have grown to exceed the rental revenue, tax incentives, equity, and increased property value? Yeah, maybe.
However, we do save heavily in my 401k plan, and this property will also build long term wealth, plus put money in our pocket right now that we can use to enjoy life while we are still young.
Why shouldn't you have access to any money you earned at any time? Shouldn't you have the freedom to determine the best way to manage your own financial future?
401ks are just another mechanism that allows politicians to manipulate the tax code to garner favor with a voting block. There are way too many of these in the tax code.
Today's tax code is now not only used to pay for the services that the government offers but allows greater mechanisms for the government to redistribute wealth and remain in power. Any time the law allows one US citizen to be treated differently than another US citizen based on political whim it has built in potential for abuse. That is what we have today.
Of course these slimeballs (Fidelity, Financial Institutions et al.) are pissed folks are cashing in...its taking it out of their thieving hands...NEXT!
Understand how it works - You pay into the 401k, they take the money and gamble with it in the Stock Market...if it rises, yeah for everyone, if it falls you lose and they get bailed out.
There is a misconception that the large majority of these people were laid off and were forced to take the retirement savings to get by. Surely, that does apply to many, but there are many more who simply look at it as a "bonus" and do not realize how they are hurting themselves in the long run. These people are generally not the same crowd as those that circle the forums on MSN Money.
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