Nothing wrong with free money, and the 401(k) structure and governing rules provide investors with a fantastic retirement savings tool. One troubling trend, though, as evidenced in recent industry studies indicates that many employees are cashing out their 401(k) account balances when switching jobs. Rather than executing a rollover of their assets to the new employer’s retirement plan or a self-directed IRA, avoiding taxes and penalties, 30-40% of Americans making a career change are opting to cash out. This may place a large strain on the retirement preparedness of those investors and can cost them a lot in terms of income tax (distributions treated as ordinary income), penalty (10%, if received prior to age 59-1/2), and lost future growth (removing the dollars from a tax-deferred savings vehicle). If cash is needed during a job change, and there is no other feasible source of liquidity beyond one’s 401(k), a better alternative may be to still move the assets into the new employer’s 401(k) plan or a self-directed IRA, then execute a distribution or loan in a potentially smaller amount, rather than cash out the entire balance. Taking this approach, you will want to first research the distribution provisions within the new plan. If you are a business owner offering a group retirement plan, be certain to provide education and financial advisory resources that your employees can access to help them make informed decisions when making changes like these. We’re all in this together; let’s avoid costly mistakes. Stay diversified, too.
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