Many people are withdrawing from their 401k funds and losing out on a big opportunity to make money in the future. Every time someone switches jobs I bet a little piece of them is wondering, what can I buy with this 401K money I have saved for years? The answer should be nothing, but that is not the case for millions of working adults. It goes to show that many people do not understand the full effect and repercussions involved when they take out retirement account money.
The only funds you can take out are the contributions of a Roth IRA that has been established for some time. When in doubt ask, and when in further doubt, have the check made out to Vanguard. (Never have the check made out in your name) Why do we tap into these funds without finding out all the information involved in the transaction?
Withdrawing from the 401K:
6 Million Americans were charged a penalty for Early Withdrawal of retirement accounts
5.8 Billion dollars in fees collected by the government by these Americans
60 Billion is the total amount withdrawn by Citizens
34% of all workers who changed jobs cashed out 401Ks
The average cash out amount is 16 thousand dollars
The average payout after penalties and taxes is 11 thousand
The possible future loss of income by the cash out is $ 471 a month cash flow.
These are the scary stats affecting the non-saving American culture that on average saves less than 5%. Do you think the people withdrawing care about the future when they tap into the 401K funds? I doubt it because spending it on something else is a bigger priority, I suppose. The big take away is that on average you will lose out on about 35% of all 401K withdrawals due to taxes and penalties. It’s like getting a loan and paying it back at 35% interest rate. I don’t know about you, but I will never borrow any amount of money for such a high interest rate. To sum up the travesty see below:
Withdrawing from the 401K (Cons):
Loss of future compound interest in retirement years
Cashing out deducts about 35-45% the total 401K account balance, depending on your tax bracket.
Must play catch up for the next 15 years+
Future Financial security is affected
You only get the 17,500 contribution opportunity once per year; if you miss the chance you can’t change that or get it back.
I’ve had three 401k plans so far and I never cashed out any retirement accounts. I rolled all of them over into Vanguard funds. I know it can be hard to see thousand of dollars, and not be able to use it today, but that is the primary reason for a 401k account. If you can take one advice from this post it is to, hold on be strong and one day you will be happy you didn’t cash it out.
I just do not see any positives when it comes to withdrawing money from 401K funds, and if you are in the position where money is tight before making drastic financial decisions research all your money options.
See the Resource – 401K
Comment what you can do besides withdrawing from the 401K?
Rich Uncle EL
People get a little silly in managing their 401Ks.. Without a doubt.
It's rather sad.
I am getting ready to switch jobs and will be faced with choices regarding my 401k.
Cashing it out is certainly not an option..
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Congrats on the new job, and a rollover is best as you already know. Thanks for the comment Jefferson.
I agree–whatever you do, don't withdraw from your 401K! I think it's best to just pretend that money isn't even there…
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Yes I think many people do pretend its not there, but when they have to switch jobs all of a sudden the pretending turns realistic, and people cash out. I mean if 60 billion has been withdrawn from 401Ks, thats a lot of people doing this terrible money mistake. Thanks for the comment.
I’ve read you can take a loan against it but don’t know the rate. I never had a retirement account because I wanted to invest the money and have cash available to snatch opportunities. So far I got a better rate of return but it is not for everyone.
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Yes I agree it’s not for everyone. Many people are very risk averse, and prefer the slow and safer route like 401K. They can’t fathom or understand any other financial routes for investing. Thanks for the comment and good luck Pauline.
That is crazy how many people cash out their 401(k)s! Good job on trying to help spread the word on how much people are losing out on doing this,
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Yes and you are helping as well Frank. Thanks for the support.
Haha, man I get that at work quite a bit… but at least you didn't see my first name and last name in the correct order and still call me Frank 🙂
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