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Here's another reason it's hard to feel good about any possible forward momentum: A Hewitt Associates study finds that even though we have talked a good game about the importance of saving during this economic crisis, it turns out that half of all workers continue to cash out their 401(k) plans when they leave or change jobs.
It's easy to see how it happens, especially if you're a worker in your twenties who thinks that you've got lots and lots of time to save for retirement. This AP story features a 29-year-old who found a need to tap into his 401(k) funds in his twenties after he gave notice to one job after getting an offer for another, only to have that offer rescinded. Out of work, he cashed out $10,000 in retirement savings and was surprised to find out that he needed to pay about a third of it upfront in taxes and penalties, and more taxes later to the IRS because the money was considered income that year.
Here's an example of what happens when you cash out 401(k) funds, from Hewitt: "An employee who cashes out a $5,000 retirement balance at age 25 would get a check for just $3,500 after taxes and penalties. Left in an account, that $5,000 may have grown over decades to $75,000 at retirement."
Easier said than done when cash and jobs are short, to be sure. But if there is any way to look at 401(k) money as if it doesn't even exist so you don't think of it as ready cash. do it. By continuing to let it ride out the market and reap the benefits of compounding interest, you may have some more options when you age--besides working until you can no longer work.
Have you felt forced to use 401(k) funds as a last resort?
