houston – This is a trend that financial experts warn that you may suffer losses that you never imagined.
Two out of five U.S. workers have cashed out their 401K plans early, and 85% of them have completely depleted their accounts. That’s a staggering number, according to a UBC Sauder Business School study.
“It’s a bad idea,” says John Lopez, senior professor of personal finance planning at California State University’s Bauer School of Business. “Putting money into my 401K is recognizing that this is my long-term retirement fund.”
According to the study, the researchers believe the difficulties often associated with changing jobs seem to drive workers to take such drastic action. Lopez said there are many risks associated with cashing out early, including fines and tax implications. He added that withdrawing cash under the age of 59 1/2 will result in a fine of 10% of the amount withdrawn.
“So, for example, if you’re in the 22% tax tier and you cash out your 401K, you’re paying 32% in taxes on the amount you take out,” Lopez said.
Lopez also said that while workers need to know the consequences of their actions, they also need to educate themselves on what to do instead. This includes leaving money in employer plans where permitted, he said. Move that money into your personal retirement account and set up an emergency savings account.
“I would like to have at least three months’ worth of expenses in these accounts,” Lopez said.
The study found that IRAs played a more important role in saving for retirement, especially among U.S. workers, who are changing jobs more frequently.
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