HOUSTON – Two out of every five American workers are cashing out of their 401K plans early with 85% of them draining their account completely. That is an alarming number, according to a study by the UBC Sauder School of Business.
“That’s a bad idea,” said John Lopez, a senior professor in personal finance planning at UH’s Bauer College of Business. “Putting money into a 401K is recognizing that this is long-term money that this is for my retirement.”
Researchers, according to the study, believe the challenges that often come with changing jobs appear to be driving workers to take such drastic actions. Lopez said there’s a lot at stake if you cash out early, including penalties and tax implications. He added that if you cash out before the age of 59 1/2, 10% of the amount taken out gets penalized.
“So if you’re in the 22% tax bracket as an example and you cash out your 401K, you’re paying 32% on the amount you brought out as taxes,” Lopez said.
Lopez also said while workers need to know the consequences of their actions, they should also educate themselves on what they should be doing instead. He said that includes leaving money in your employer’s plan, if that’s allowed. Roll the money over to an Individual Retirement Account and set up an emergency savings account.
“We would like to see a minimum of three months of expenses to be put into those accounts,” Lopez said.
The study also found that IRAs are playing a more critical role in helping American workers save for retirement, especially as they change jobs more frequently.