A staggering $5.3 trillion lies in the company-sponsored 401(k) plans of baby boomers planning for their retirement.
If these are your hard-earned funds, then you might be wondering what you should do with it.
Should you roll it over to an Individual Retirement Account (IRA) at a financial firm? Or maybe just leave the money where it is?
When it comes to managing your 401(k), even financial advisers can’t agree on a “one size fits all” solution for everyone. There are simply too many pros and cons.
But whatever you choose to do, be careful to avoid this key mistake that could potentially derail your whole retirement. Here is the one thing you should never do with your 401(k).
Don’t take an early withdrawal. Easy enough, right?
But, life isn’t always so simple — maybe you’ve lost your job and are having a hard time paying the bills, or maybe you’ve been hit with a sudden unexpected expense.
So why not dip into the money you’ve saved in your 401k? After all, It’s the fruit of all your hard work, you deserve it.
But, there are two very good reasons why you shouldn’t even consider dipping into the 401k. Not only will you be taxed on whatever you withdraw, but if you withdraw before reaching age 59 and 1/2, then you’ll be hit with a 10% early withdrawal penalty on whatever you take out.
Dan Houston, chairman, president and CEO of Principal Financial Group in Des Moines, has something to say to those considering cashing out their 401(k).
“My number one piece of advice is this — keep it in the plan, roll it over into an IRA or convert it to lifetime income, but please do not cash it out […] People say ‘I want to buy a car.’ All you’ve done is mortgaged your retirement future. It’s bad math and it doesn’t end well for that participant,” Houston told NextAveue.
Perhaps you aren’t inclined to dip in to your savings, but you are simply changing jobs.
If you stop working for the company that sponsors your 401(k), then you might fancy cashing out and starting a new one with your next employer.
This could be a mistake however, as the early withdrawal penalty still applies when you cash out a 401(k) upon leaving a job.
Your best bet is actually to transfer that money into your new employer’s plan, or roll it into an IRA. Otherwise, you will be hit with taxes and penalties that will quickly shrink those hard-earned savings.
Regardless of the penalties, the more money that you withdraw before retirement, the less you will have to enjoy when you do decide to retire — which is reason enough to stay away from that nest egg until you actually retire for good.