You Can Take the Money Out, but You Probably Shouldn’t

Problem is, a lot of people withdraw funds decades before their actual retirement. In the industry it’s called 401(k) leakage, and it can happen in a few different ways:

• Cashouts. You leave your job and withdraw the entire balance.
• Hardship withdrawals. You take money out for an emergency. (Most employer-sponsored retirement plans allow savers to do this.)
• Loan defaults. You borrow against your retirement account and don’t repay the loan.
• Delays. You choose not to participate in a workplace plan or put off the start date for saving.

Here’s the drawback for each of these leaks.

• A cash withdrawal means you miss out on years — or even decades — of compounding interest on your hard-earned cash.
• If you can’t repay the full amount of your loan when your job ends, that outstanding loan balance will become a distribution. That could mean penalties and taxes.
• Delaying your contributions has the same downside as a withdrawal. You’re missing out on the chance to save and compound the money over decades.

If you have a real emergency, hardship withdrawals should be a last resort after scouting personal loans, borrowing from family and friends, or taking out a loan from your 401(k).

This is a decision you shouldn’t make lightly. Sadly, given inflation, among other factors, Americans increasingly took hardship distributions this year. For more, read Sarah Hansen’s story.

— Jill Cornfield, deputy editor

The less people have stashed in a retirement account, the likelier they are to cash it out when the job ends. According to a paper that examined participant behavior over nine years, 80% of American workers whose balances were less than $1,000 cashed out their entire balance. For people with $250,000 or more in their accounts, the cashout rate was just 2%.

• Here’s how Americans spend their time and money in retirement.
• It’s great to get an early jump on saving for retirement. But what if you didn’t? These four tips can help you catch up.
• This proposed federal bill would shore up women’s retirement security by preventing someone from taking distributions or loans from a 401(k) without their spouse’s knowledge or consent.

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