Spark News recently discussed job hopping and how it can potentially harm your career. Moving from job to job can certainly hinder your marketability, but what about your savings and your 401(k)? Skipping from job to job might not seem so appealing once it starts dipping into your life savings.
According to CBS News, the fact that 401(k)s allow you to cash out your savings when you switch jobs is one of its downfalls. In light of this fact, nearly half of the workers that do switch jobs end up taking out their savings rather than transfer them to a new 401(k) account. While most of the workers that are cashing out their 401(k)s are young and haven’t amassed a large balance yet, they are still hurting their finances in the long run. As CBS states, “typically workers change jobs five to seven times before they settle into a long-term job, and if they cash out a small 401(k) account every two years, they could be cashing out their retirement savings with nothing to show for it after ten years.” So, why is it not in your best interest to cash out your 401(k) when you switch jobs?
Cashing out your 401(k) can waste a lot of your money in penalty fees and taxes. For instance, cashing out your 401(k) can cost you 30 to 40 percent in taxes alone including a 10 percent penalty fee. With only these fees, you’re truly only collecting around 60 percent of your money. When you take a look at the numbers, cashing out no longer seems like a good idea but rather a retirement hurdle. Each time you take your money out of your 401(k) you’re setting your retirement funds and date back. When the economy is in a weak state and money is needed all around, it may seem like a good idea. However, those that are in dire need of the money likely don’t even have the money in there needed to make the cash out significant.
Instead of cashing out, workers switching jobs should consider transferring their current 401(k) to the plan their new job offers. This is probably the best way to go, but issues arise when the new company’s plan isn’t as great as their previous one. In that case, 401(k) holders also have the choice of rolling it over to an IRA or leaving the balance in your old plan. If you opt to rollover the amount to an IRA all you have to do is open up a rollover IRA with a mutual fund or brokerage company and have your previous administrator to make your fund payable to your new rollover IRA. This way you can preserve your retirement funds and not be met with countless penalties and fees.
SOURCE: CBS News
IMAGE: Black Enterprise