NASD Investor Alert Warns Workers About Cashing Out Of 401(k) Plan
Washington, DC — NASD issued an Investor Alert warning investors that cashing out of even a modest amount of their 401(k) assets can have a potentially devastating impact on their retirement savings.
NASD's Investor Alert, Think Twice Before Cashing Out Your 401(k), speaks to workers facing investment decisions prompted by job changes and examines the short- and long-term consequences of withdrawing funds from a 401(k) plan before turning 59 ½.
"It can be very tempting for employees to tap their 401(k) plans to pay bills or take that special vacation," said NASD Vice Chairman Mary Schapiro. "It is our hope that this Alert will help workers make better investment choices that take into account their long-term goals of retirement security."
A recent study indicates that 45 percent of employees cash out their 401(k) plans when they change jobs. The Alert explains there are other options, including leaving the money in the former employer's plan, rolling over the money to the new employer's plan if that plan accepts transfers, or rolling over the money into an Individual Retirement Account (IRA).
The Alert describes how cashing out of a 401(k) too soon can cost an investor dearly, both immediately and in the long run:
- If monies are not transferred to an IRA or the new employer's plan within 60 days, the current employer is required to withhold 20 percent of the account balance to prepay federal taxes.
- If the money is withdrawn, federal income taxes will be due on the entire withdrawal, in addition to state and local taxes. Plus, you may have to pay a 10 percent early withdrawal penalty on top of the combined federal, state and local taxes owed.
To demonstrate the significant savings opportunities of maintaining a 401(k) plan, the Alert describes a 30-year-old investor who has a 401(k) balance of $20,000. If the investor leaves that money in a 401(k) with an average six percent rate of return over the next 32 years, the investor's balance at retirement will be $129,068 - even if no additional contributions are made during that time.
Investors may be better off borrowing from their 401(k) than cashing it out, the Alert suggests. Depending on the plan's terms, investors may be able to borrow at a lower rate from their account than they could from a bank or other lender, especially if they have low credit scores. At the very least, investors should check with their plan administrators to learn whether this option makes sense for them before they cash out. |
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