The Risks of Cashing Out Your 401(k) When You Leave a Job
When you leave a job, you may be faced with the decision of what to do with the money in your 401(k). Your options include leaving the money where it is, moving it into a different 401(k) plan with your new employer, cashing it out, or rolling it over to an IRA. Rolling your 401(k) over to an IRA can offer several advantages, including more control over your investments and fees.[0] However, if you cash out your 401(k) before you reach the age limit (59 ½, or 55 in certain circumstances), you’ll be subject to income taxes as well as a 10% early withdrawal penalty.[1]
The Harvard Business Review warns that too many people cash out their entire 401(k)s when they leave a job.[2] Shockingly, 41.4% of employees cashed out 401(k) savings on the way out the door, and 85% of those who cashed out drained their entire balance.[2] According to the report, if a larger part of an individual’s balance is provided by their employer, they are more likely to view their savings as “house money” or “free money” when asked to consider cashing out their savings upon changing jobs.[2]
When it comes to contributing to a 401(k), the IRS allows you to contribute up to $22,500 in 2023, plus an additional $7,500 if you’re 50 or older.[3] Many employers match their employees’ contributions up to a percentage of their salary.[4]
Employers could take steps to dramatically improve employees’ retirement security at a very low cost to them.[5] The Secure 2.0 Act, which was passed into law in December 2022, gives employees the option to set aside up to $2,500 annually to cover unexpected expenses without having to withdraw from their retirement savings.[2] Employers should promote the utilization of retirement accounts and caution new hires against cashing out when they switch jobs when onboarding them and detailing their retirement benefits.[5]
Those with 401(k)s can access their defined contribution plan assets prior to retirement by either taking a loan from their account balance or by making a hardship or in-service withdrawal. Furthermore, the repayment plan for most 401(k) loans is typically only five years; however, if you use the loan to purchase a primary residence, you might be given more time to pay it back.[1]
To access the money from a previous employer’s 401(k) plan, contact the plan administrator.
0. “How to Roll Over a 401(k)” Business Insider, 3 Mar. 2023, https://www.businessinsider.com/personal-finance/how-to-roll-over-401k
1. “When can I withdraw from my 401(k)?” msnNOW, 8 Mar. 2023, https://www.msn.com/en-us/money/personalfinance/when-can-i-withdraw-from-my-401-k/ar-AA18n59w?ocid=a2hs
2. “Employees Risk Their Future When Cashing Out 401(k), Report Warns” jacksonprogress-argus, 5 Mar. 2023, https://www.jacksonprogress-argus.com/arena/thestreet/employees-risk-their-future-when-cashing-out-401-k-report-warns/article_f48b18fa-1473-5a60-b2bc-4dac35ebb757.html
3. “I Overcontributed to My 401(k). What Do I Do Now?” Yahoo Entertainment, 9 Mar. 2023, https://www.yahoo.com/entertainment/overcontributed-401-k-now-140021072.html
4. “What happens to your 401(k) when you quit?” USA TODAY, 7 Mar. 2023, https://www.usatoday.com/money/blueprint/retirement/401-k-when-you-quit/
5. “Too Many Employees Cash Out Their 401(k)s When Leaving a Job” HBR.org Daily, 7 Mar. 2023, https://hbr.org/2023/03/too-many-employees-cash-out-their-401ks-when-leaving-a-job
