How to Avoid Cashing Out Your 401(k)
It’s easier to transfer your savings to your new employer’s plan.
If you’re changing jobs, you will probably remember to pack your framed pictures, lucky pen and alma mater coffee mug. But there’s something else you should take with you: your 401(k).
Until recently, that was easier said than done. But a U.S. Labor Department ruling last fall could open the door for automatic 401(k) transfers between employers, which means fewer employees will be tempted to cash out, triggering taxes and early-withdrawal penalties if they’re younger than 55. Cash-outs, which are most common among workers with less than $5,000 saved, will cost Americans $2 trillion in savings over the next decade, according to Deloitte Consulting.
“Someone with a $5,000 balance in their 401(k) might lose $1,750 as a result of an early withdrawal,” says Mike Giefer, a certified financial planner in Minneapolis. Plus, “if they don’t retire for 40 years, that money invested could have been worth $75,000” (assuming a 7% yearly return).
Companies that don’t participate in automatic rollovers may still let you roll over your former employer’s 401(k) to their plan. If your next job doesn’t allow rollovers—or doesn’t offer a 401(k)—roll your savings into an IRA.