The Biggest 401(k) Mistake To Avoid

Do you have staff who are moving between employment opportunities or do you know someone pondering a change? Although employees shifting from job to job is declining, for anyone changing who had a 401K through their employer, it is possible they are at risk of making one of the biggest financial mistakes due to switching employment according to an article in Accounting Today. 

Once a worker leaves their prior position, the employers could potentially dissolve the 401(k) if their balance is low enough to do so. Employers could send the cash directly back to the individual or put the money into an IRA that may have high fees. 

Neither of these options are ideal, however, it can be particularly dangerous for those workers who receive the funds directly. 

The reason this is an issue is because these individuals must roll the money into a new employer plan or IRA within 60 days or face a 10% penalty, owe income tax, and lose the benefit of the money compounding. Unfortunately, this is the last thing a worker is thinking about when switching positions. 

With an increasing mobile workforce with staff staying at jobs only a few years on average, 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 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 retirement program. Employees with little funds in their savings account may choose to cash out not understanding the implications of doing so.  

For example, if a worker has $900 in their 401(k) they would have to pay a $90 penalty and may pay around $180 in taxes. This leaves them 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 assuming the rate of return is 5%. 

If you know of someone changing positions, especially if one of your staff and you offer a 401(k) plan, let them know they 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.