Should You Cash Out Your 401K When You Change Jobs?, #161
Have you ever been tempted to cash out your 401k when changing employment? Is this really a good option? On today’s episode, I’m exploring the 401k cash-out culture in America, why people do it, whether or not you should do it, and retirement-friendly alternatives to cashing out your 401k.
You will want to hear this episode if you are interested in...
What’s going on with American retirement plans? [1:33]
Exploring alternatives to cashing out your 401k [3:45]
Why are so many people cashing in their 401k? [5:13]
How employers can help departing employees save for retirement [7:31]
How YOU should handle your 401k [9:44]
Getting the facts on 401ks
A recent Harvard Business Review study found that 41% of Americans are cashing out their 401ks when they change jobs. And with 30% of Americans changing jobs in 2022 alone, that leaves a lot of people potentially starting from scratch with their retirement savings. According to data from Vanguard in 2021, the median 401k for someone 55 to 65 years of age was $89,716. Believe it or not, that is hardly enough money to retire on. And for many middle-income Americans, this probably wouldn’t last more than five years.
When you cash out your retirement plan, not only do you pay taxes on that money, but there is an extra 10% penalty if you're under age 59 and a half. If you’re not careful, you could wipe out nearly half of your savings between taxes and penalties. Oddly enough, the US is one of the only developed countries that allows such easy access to retirement plans. In many countries, you can't access your retirement funds until retirement, and you must demonstrate a significant financial hardship to access it.
Understanding cash-out culture
So why are people cashing out their 401ks in droves? One of the big reasons is that employers will automatically cash out your retirement plan if the balance is less than $1000. It makes sense from an employer and a retirement plan perspective because there are costs associated with maintaining the latter. But this does the exiting employee zero favors! Thankfully, you can deposit that check into another IRA within 60 days and avoid paying income taxes on the withdrawal. Listen to this episode for alternatives to cashing out your 401k!
Resources Mentioned
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