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A Retirement Planning Mistake Too Many Americans Are Making

401(k) Plans Financial Planning

Key Takeaways

  • Withdrawing money from your 401(k) before the legal retirement age, and without a qualifying emergency, results in a sizable tax bill, fines, lost contributions, and a diminished return on your previous investments.
  • Workers moving companies, and thereby moving their retirement assets, should look into an IRA roll-over or waiting until they secure a new position to roll the assets over into the new 401(k) plan.

More than 41% of workers are cashing out their 401(k) balances when they leave their jobs; "there are a number of financial problems with such a move", aptly put by Yahoo Finance.

When a worker withdrawals their assets from their 401(k) account before retirement, and not as part of a hardship withdrawal:

- They are subject to an early 10% withdrawal penalty.
- Their 401(k) plan is taxed as income when the money is withdrawn.
- If their account is not 100% vested, they forfeit their employer's contributions to their plan.
- And if they took out a loan against their 401(k), they must repay the balance- IN FULL- before the next federal tax filing date

YIKES. So why are people shooting themselves in the foot? The age old question, are humans rational beings in regards to money?

We hypothesize that it is because workers are not as financially literate as they believe themselves to be, or they are financially stressed to the point they are dealing with immediate matters before long term financial goals. More than likely, they are also unaware that the entire purpose of a retirement account you are incentivized to leave until retirement, is not and should not be treated as an emergency fund.

If you would like to save for health-care related expenses: HSA

If you would like to save for education-related expenses: 529

If you would like to have an emergency savings account: High yield savings account

A 401(k) is simply a type of account, with purposeful barriers so that you are better prepared when you are unable to work, or retire, later in life- a piggy bank you cannot break prematurely, lest you cut yourself on the pieces.

To read the Yahoo Finance article in full:

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