GRAND RAPIDS, MI - There's a growing trend with U.S.
workers who change jobs - they're cashing out their
retirement accounts. A recent survey of 401(k)
participants, done by Hewitt and Associates, shows that
about half of employees that leave their jobs choose to
cash out their 401(k) plans instead of rolling them over.
This trend might seem harmless at the time, but it can
jeopardize future retirement.
There are several reasons why people are choosing to cash
out now, instead of saving the money for retirement. A
common reason might be the increase of health insurance
premiums. People aren't used to paying several hundred
dollars a month to insure their families. Insurance costs
combined with a loss in stock value or other investments;
make people feel the need for extra money now. They also
believe that they'll make up for it down the road. Many
people would rather pay penalties and taxes than wait for a
larger return. The rising value of real estate has people
believing the value of their homes will replace retirement
savings. And it's true that a lot of money can be tied up
in real estate, but it shouldn't be your only source for
retirement savings.
People need to look at what they will lose by cashing out.
You have to pay income taxes on the withdrawal, which could
end up putting you in a higher tax bracket. Plus, there's
a 10 percent penalty if you're under age 59½ and
more importantly, you give up years of tax-deferred
compounding. With longer life expectancies, you're going
to need enough savings to cover long-term health care.
After you look at what you're going to lose, look at why.
Is it because you need the money to pay off high interest
credit card bills or is it because you don't want to go
through the hassle of transferring the money to another
account? To avoid regret, you should look at all your
choices before making a decision.
Choice #1: Rollover into an IRA - You won't be limited by
the investment options in a new employer's plan and you can
take distributions from the IRA without penalties under
certain circumstances. In short, you'll retain the ability
to borrow from the account.
Choice #2 : Rollover into New Employer's 401(k) - Not all
companies allow such rollovers. But if you like the plan,
the rollover will allow you to consolidate your savings in
one place.
Choice #3: Rollover a Portion - It doesn't have to be all
or nothing. This can be a great option for those that need
money now, but realize they will also need it later.
Choice #4: Liquidate - If it's really going to improve your
life, then it can be a viable option. But there's a
difference between life and lifestyle. Be careful to
distinguish between the two.
We all have trouble saving money, but everyone can do it if
they have a plan. If you're unsure about what you should
do with your 401(k) or retirement plan, seek the advice of
a financial professional you trust. The initial
consultation is usually free.
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In 1999 Daniel Wansten founded Professional Education
Services as one of the nations leading authorities on
solving cash flow problems for families. Daniel has been
seen on TV 13 news and featured in several newspapers and
magazines. For free help on paying the college bill go to
our website http://www.HowToAffordCollege.com and for free
help with rollovers or other financial planning please
contact our office at 866-949-7935.
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