Millennials Are Making Career Moves That Could Be Costly
A recent study conducted by American Funds found that millennials are serious about saving for retirement. In fact, nine out of 10 said they contribute to a 401(k) or IRA. However, some of them may be cashing out too soon.
The same study revealed that two-thirds of millennials have held at least two jobs in the past five years. That means many who contribute to employer-sponsored retirement plans need to decide what to do with those assets when they change jobs.
It’s Easy to Move Your Retirement Savings
The good news is that 83% of millennials said it’s easy to roll over their retirement savings from their prior plan to a new one. In doing so, they can continue to benefit from tax-deferred or tax-free growth, and avoid current taxes and a possible 10% early withdrawal penalty.
Keep in mind that when you move your retirement savings to a new plan, your investment options may change and you may be subject to different rules, including withdrawal restrictions.
Of course, you should carefully consider all of your options before making changes. Learn more about rollovers and the other options for your retirement plan money.
Think Twice About Cashing Out
While cashing out your plan may be appropriate in certain situations (e.g., a financial emergency), it’s important to know that it can come at a hefty cost. First, your employer must withhold 20% of the taxable portion of your distribution for federal taxes (depending on your tax bracket, it may actually be more or less). Second, you may have to pay state and local taxes as well. Lastly, you’ll incur a 10% early withdrawal penalty unless you qualify for an exception.
Taxes and penalty aside, missing out on the long-term potential for tax-deferred growth could be an even greater cost.
Source: Wisdom of Experience Survey Series by American Funds, May 2017.