Alarming Number of Working Americans Cashing Out Retirement Accounts When Changing Jobs
The very essence of a retirement nest egg lies in the concept of patient growth and compounding of investments over time, intended to provide financial security during retirement. However, it is alarming to note that a significant number of younger workers are prematurely cashing out their retirement accounts when changing jobs.
A study from the UBC Sauder School of Business reveals that over 41% of workers leaving their jobs cashed out their employer-sponsored 401(k) retirement plans, an increase from the pre-pandemic level when only one in every three departing workers did so.
This trend comes with several financial consequences, as withdrawals are taxed as ordinary income, subject to the worker’s marginal tax rate. The Internal Revenue Service (IRS) also imposes a 10% penalty for withdrawals made before the age of 59.5, in addition to possible losses of employer matches and the valuable long-term compounding of untaxed money.
Depending on the balance, employers may force employees to cash out their accounts when leaving a job, further subjecting them to fees and taxes. Workers are encouraged to seek financial advice to avoid the negative impact on their retirement savings, especially since taking loans against 401(k) balances or cashing out before reaching retirement age can have detrimental financial implications.
The bottom line is that cashing out 401(k) balances when leaving a job can result in immediate taxes and penalties, and it may not provide enough financial security for retirement needs. Consequently, workers are advised to carefully consider the implications and seek the help of a financial advisor to ensure they are financially prepared for retirement. Additionally, workers should explore their options for transferring funds to an individual retirement account (IRA) or their new employer’s 401(k) plan to avoid unnecessary taxes and penalties.
