There’s a huge leak that, drip by drip, is downing out millions of Americans’ hope for a financially secure retirement.
When they change jobs, it’s up to workers to make a deliberate effort to plug the hole their 401K money can so easily slip through.
A recent survey of 5,000 workers by the Defined Contribution Institutional Investment Association found that one-quarter of Baby Boomers and one-third of younger workers [born after 1964]] took the funds from their 401K when they changed jobs, instead of "rolling-over" the money by putting it directly into another retirement account, or leaving it in their former employer’s 401K plan.
Using 401Kmoney now instead of rolling it over results in what’s termed "leakage," and the retirement experts and the federal government worry that it will cause big problems later when workers hope to retire with more than just a Social Security check.
Federal rules already discourage leakage. Taking 401K when you’re under age 591/2 means you’ll pay income taxes on the amount, as well as a ten percent penalty for early withdrawal.
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But given the financial and time pressures on many workers, it’s understandable that they’d grab the funds. Indeed, research from the Employee Benefits Research Institute [EBRI] finds that paying off debt is a popular way workers use early distributions of their 401K.
Ironically, though the government wants to encourage retirement saving, there’s a federal law allowing firms to "force-out" the 401K money of an employee leaving the company when his account amounts to less than $5,000.
Job changers should take the time to roll-over their money, or see if they can arrange it to stay at their employers’ plan, advises Tony Webb of the Boston College Center For Retirement Research.
Roll-overs require careful transfers directly into another retirement account, look at the rules posted at http://bit.ly/401kroll, advises Jack Vanderhei of the EBRI.
