For those workers that tend to jump from job to job, it is possible they are at risk of making one of the biggest financial mistakes due to constantly switching employment.
For example, their former employers could potentially dissolve the 401(k) that they have worked hard for if their balance is low enough to do so. Employers could also send the cash directly back to the individual or put the money into an IRA that most likely has high fees.
Of course, neither of these options are great, however, it can be particularly dangerous for those workers who receive a check.
The reason this is a danger is because these individuals must roll the money into a new employer plan or IRA within 60 days or otherwise face a 10% penalty, owe income tax, and lose the benefit of the money compounding. Unfortunately, this is the last thing a worker wants to deal with when switching positions or thinking about when a layoff occurs.
It has been found that this issue is most likely going to get worse due to our country’s mobile workforce. It is possible we will see an increase in individuals moving positions as they find more remote friendly jobs that better fit their lifestyles.
This is concerning because it has been found that roughly 33% of workers in their 20’s choose to cash out their 401(k). Only 2% of companies will allow former employers with under $1,000 in their savings to remain in the company’s 401(k) retirement program. This can be an issue for those employees with little funds in their savings account and choose to cash out.
For example, if a worker only has $900 in their 401(k) they would have to pay a $90 penalty and may pay around $180 in taxes. This leaves the individual with $630.
However, if this employee chose to move the funds into another retirement plan, it is possible they would have $3,796 available to withdraw without a penalty at 59 ½. This is assuming that the rate of return is 5%.
Employees leaving their place of employment should speak to a financial advisor who handles retirement plans to assist with a tax and penalty free rollover. If you don’t have someone you know and trust, reach out to us for a referral.
