During the housing boom earlier this century, when folks were strapped for cash they often borrowed against their homes. But since the financial crisis of 2008, it’s a lot harder to tap into the value of your home. Now many people are turning to another source of quick cash — their own 401(k) fund.
According to a report from Bloomberg Businessweek, in 2011 Americans withdrew $57 billion from their retirement accounts before they reached the age when penalties no longer apply — typically age 59 ½. The IRS collected $5.7 billion in early withdrawal penalties that year.
According to data from Fidelity, the largest 401(k) plan servicer, workers aged 20 to 39 have the highest withdrawal rates, with 41 percent cashing out their retirement plan accounts when they leave their job.
Younger workers who do this think that their small balance isn’t worth the trouble to roll over. The problem is that cashing out these small 401(k) plan account balances can have a significant impact on future savings. Workers are likely to change jobs five to seven times before they settle into a long-term position. If they cash out their 401(k) every two years, they could find themselves with nothing saved for retirement well into their 30’s.