401(k) Balances Double … But There’s a Catch

Anna Williams
Posted

Would you like the good news or the bad news first?

A new report from Fidelity Investments reveals some favorable findings about the state of Americans’ retirement savings … but also hits upon one particularly troubling stat.

According to the report, 401(k) balances managed by Fidelity are now, on average, nearly double what they were in 2009. At that time, in the midst of the recession, the average account hit a low of $46,200; today, that number is approaching $90,000.

That doesn’t exactly mean that we’re all getting better about socking away more cash into our nest eggs. In fact, most of the increase—78%—was attributed to the surging stock market last year. Ideally, half of the increase should be due to a rise in participation contributions, Jeanne Thompson, vice president at Fidelity Investments, told USA Today. Still, Fidelity welcomed the findings as great news overall for Americans’ retirement.

On the other hand, the report uncovered one area of concern: More than a third—35%—of all Fidelity 401(k) participants ended up cashing out their balances when they left a job in 2013, pulling out nearly $16,000 on average.

Why is cashing out a 401(k) such a problem?

Switching jobs can be stressful, and you may think you need that extra cash to help buffer the transition. But there’s two major reasons why cashing out a retirement account can be a major mistake. First, withdrawing money from a 401(k) before the age of 59½ means you’ll be hit with a substantial penalty: You’ll pay 10% on the funds—plus taxes on any investment gains.

Second, you’re missing out on the greatest advantage we have when it comes to saving for retirement: time. By removing your money from a tax-advantaged investment account, you’re sacrificing crucial months of growth.

Look at it this way: If a 30-year-old today cashes out $16,000 when switching jobs, she could potentially be losing out on an extra $471 per month during her retirement. On top of that, she’d also have to shell out roughly $3,200 in taxes—and another $1,600 in withdrawal penalties.

To avoid this major no-no yourself, learn how to move your money the right away—by rolling over your account into a new 401(k) or IRA.