NEW YORK -- If you're changing jobs this summer and you've got several thousand dollars in your 401(k) retirement account, here's a brief quiz for you. Should you:
a) Take a cash payout on the 401(k) and buy a new TV?
b) Roll it over into an Individual Retirement Account?
c) Leave the money where it is so it can continue to grow?
d) Move it to the 401(k) plan at your new place of work?
While answers b, c and d all lead to more earnings for retirement, an astonishing 68 percent of workers opt for cash payments when changing jobs, according to a study by Hewitt Associates, which looked at the disbursements from 170,000 accounts last year.
Company-sponsored 401(k) plans allow workers to contribute up to $10,500 a year in pretax income toward their retirement. Contributions -- often matched at least in part by employers -- grow tax-free until the money is withdrawn at age 59 1/2 or after. Similar accounts called 403(b)s are available for teachers and government workers.
While Americans have become quite savvy about opening and managing such accounts, they seem quite naive about what to do with them when they change jobs, financial experts say. And cashing out is an especially big temptation for young people.
"I think most people see this as a windfall," said Mike McCarthy, a savings consultant for Hewitt Associates, a Lincolnshire, Ill., firm that administers retirement programs for large companies. "They haven't had access to this money before, and when they do, they use it to buy a car, buy a boat, pay off credit card debts."
Such a decision comes at great cost.
When you cash in a 401(k) account prematurely, you lose more than the opportunity to continue earning interest and dividends on your investments. You also face a loss of roughly 40 percent of your nest egg -- 10 percent in penalty fees, 20 percent in federal withholding taxes and the rest in state and local taxes.
Hewitt's study indicated that those most likely to cash in their 401(k) accounts when changing jobs are those who have worked a short time at a company and have relatively low balances.
"They think of it as a nominal amount of money instead of thinking about the long-range impact of those dollars," said Boni Callaway, manager of investor education for Invesco Funds of Denver.
She points out, for example, that a young worker who does manage to save $25,000 in a 401(k) could take a cash payment and buy a car. On the other hand, that balance invested in the stock market or mutual funds for 35 years would grow to more than $700,000, assuming a 10 percent annual return.
Just $2,000 left to grow at 10 percent a year for 35 years would yield more than $56,000.
Callaway believes that part of the problem is that "people leaving one company and going to another get a stack of paperwork when departing ... and don't take the time to read what they need to do so to take advantage of various options."
The 401(k) saver has several.
If the account totals more than $5,000, the funds often can be left in the former employer's 401(k) plan indefinitely. If the total is less than $5,000, the saver can "roll" the money into an IRA account, which can be set up easily at local banks or at mutual fund and brokerage companies.
Or the saver can ask the company to roll the money into a "conduit IRA" for eventual deposit in the 401(k) plan of the new employer.
McCarthy of Hewitt Associates points out that there is a way for job changers to have their cake and eat it, too.
"If you really want to buy something, why not roll over to money into your new employer's 401(k) ... and take out a loan against it, then gradually pay yourself back," he says.
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