Your 401(k): Worst Mistake You Can MakeSmart: You regularly contribute to your 401(k).
Dumb: You change jobs and cash out your account.
Cashing out your 401(k) and pocketing the money--instead of leaving it where it is or rolling it into another tax-deferred retirement account--is the worst financial mistake you can make when it comes to saving for the day when you no longer work. And if you did this, you're not alone. Fully 35 percent of workers cashed out their 401(k) accounts in 2013, up slightly from 32 percent in 2009, according to Fidelity Investments, the largest 401(k) provider in the United States.
Why is it such a mistake to raid your 401(k)? Two reasons:
The average balance cashed out in 2013 was $16,000. After the penalty and taxes, the average amount left was just $11,200.
And that's not the worst of it. Jeanne Thompson, vice president at Fidelity Investments, tells The Associated Press that the biggest penalty is the lost opportunity of saving, since the amount withdrawn no longer gets the compounded growth it would have earned had it remained in the 401(k).
Cashing out is most common among younger workers. Among those ages 20 to 38 years old who left their jobs in 2013, 41 percent cleared out their retirement accounts--and those are the ones who would benefit the most by letting the money grow.
"Many young people are struggling: They're paying off debt or trying to buy their first car or first home," Thompson told AP.
But note this astounding fact: Had that $16,000 remained in the 401(k), it eventually would have provided almost $500 per month in income during retirement--without adding any additional funds to that principal. Instead, it was cashed out for $11,200.
If your employer forces you to cash out when you leave the job, which often happens if the amount is less than $5,000, then roll the money into an Individual Retirement Account (IRA) or into your new employer's 401(k) plan.