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November 2016  Volume 9, Number 11        
 

401(k) Saving Pitfalls

It might be tempting to view your 401(k) retirement fund as a savings plan you can borrow from in case of an emergency, but the price you pay for using that money before you turn 59 ½ can be steep.

True Costs

The more you take out of your account, the longer you’re going to have to work before you can retire. You miss out on the ability to watch your funds compound tax-free. For instance, $5,500 taken out now could have grown to $58,721 in 35 years. Plus, if your employer matches a percentage of your funds, you won’t be able to take advantage of this “free” money.

You’ll also pay substantial penalties if you withdraw money early. You have to pay about 20 percent in federal and state income taxes in addition to a 10 percent withdrawal penalty. If you take out $50,000, you’ll only receive about $35,000 in cash.

Biggest Traps

While you might guess that most people who make early withdrawals do so for hardship reasons, the biggest temptation to cash out a plan often comes when a worker changes jobs.

A report by the Employee Benefit Research Institute shows that 40 percent of the 12.5 million people who change jobs annually have less than $5,000 in their retirement accounts. Of these workers, 37 percent cash out their plans because they need the money and 63 percent believe it’s the easiest option, even though they have to pay steep financial penalties.

Fidelity Security also has done research on this topic and found that one in three workers cashes out their 401(k) account when changing jobs.

A Better Option When Changing Jobs

To make sure you avoid that trap, leave your money in its present account; transfer your 401(k) to your new employer; or seek assistance from a broker with experience with retirement accounts.

 

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In this issue:

This Just In...

Are You Choosing the Right Health Insurance?

Is it Time to See a Financial Planner?

Life Insurance Myths Debunked

401(k) Saving Pitfalls

 


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