A third of employed people say they plan to look for a new job this year, and many of them are likely to make withdrawals from their 401(k) — a move financial planners almost always advise against. Show
Thirty-six percent of workers polled last November say they plan to look for a new job in the next 12 months, according to a workhuman survey. The survey includes 2,268 fully employed people in the U.S., U.K., Canada and Ireland as respondents. However, many of the U.S. workers who have quit their jobs during the pandemic — a phenomenon known as the Great Resignation — say they've cashed in their savings to make it happen. Around 21% of Americans who quit their jobs during the pandemic say they cashed out their 401(k), according to a recent Fidelity survey of 2,622 U.S. adults with at least one retirement account. However, financial planners generally recommend that workers avoid making any early withdrawals from their retirement savings in order to let the money grow for when they actually retire. "Cashing out of a 401(k) is probably the most tempting — yet often most devastating — action someone can take when they leave their employer," says Scott D. Schwalich, a wealth strategy advisor at Anderson Financial Strategies, LLC. Early withdrawals before age 59½ typically trigger a 10% penalty. Plus, the withdrawal is taxed as income, which creates a potential 10 to 37% tax burden for the worker, Schwalich says. Even worse: "you can't make up for lost time," he adds. The cost of missing out on years of compound interest can drastically reduce your retirement savings, which could force you to work longer than you originally planned. "Every client we've ever worked with wants to reach that 'work is optional' stage in life, regardless of how much they love their job," Schwalich says. "For many, cashing out of a 401(k) could cause that day to come too late." Of course, sometimes people are forced to cash out their retirement savings to cover the cost of unexpected emergencies, like debt from medical bills. In fact, there are reasons for withdrawals that won't trigger the 10% penalty, like having a disability or needing to pay for taxes and health insurance premiums. However, the withdrawal is still taxed as income. Make sure you have a financial plan before quitting your jobConsidering the penalties, you don't want to withdraw early from a 401(k) if you can help it, especially if you're quitting your job without something else lined up. "The labor market is in a position right now where there's a lot of power on the employee, so they should be able to get another job sooner rather than later," says Rob Greenman, a certified financial planner and chief growth officer at Vista Capital Partners. "But that's not a sure thing." Greenman suggests putting some "guardrails" in place before leaving your current job to prevent you from needing to make withdrawals. These include a topped-up emergency fund worth three to six months of your expenses, including monthly health insurance payments, and some sort of health insurance while unemployed. He also recommends seeking out jobs that offer "happiness and purpose," not just more money. By ensuring that a new job is a good fit, you'll be less likely to quit the role because it makes you unhappy. "The problem with 401(k)s is that you can withdraw from them a little bit easier. For example, you can't easily take $10,000 or $5,000 out of your house," says Greenman. "I think that's why we hear about that happening more frequently." Don't miss: Here's how much money Americans lose to online scammers at every age The 10 most-searched jobs in the U.S., according to Google—and how much they pay Sign up now: Get smarter about your money and career with our weekly newsletter 
When you quit your job, you have five options for your 401(k): If you’re considering quitting or transitioning jobs, you may be wondering what to do with your 401(k). Each of the options above has benefits and drawbacks, and you should carefully consider what’s best for you. Before you
decide what to do with your 401(k), make sure you don’t have a loan on your 401(k). 401(k) loans are appealing because they don’t affect your debt-to-income ratio — however, if you can’t repay it by the tax due date after leaving your job, you’ll be taxed on the balance and charged an early withdrawal fee. Some companies offer special options here, so
you should always check with your 401(k) administrator and plan documents. You’ll also want to keep in mind the fact that some account types only allow one rollover per year — so if you’re changing jobs frequently, this is something to be aware of. Refer to this chart from the IRS to learn more about account rollovers.
With this in mind, you have the following options for your 401(k) when quitting your job: Many are surprised to learn that in certain circumstances, you can leave your 401(k) with your old company’s retirement plan. However, if you have less than $5,000 in retirement savings, your company may force you out by issuing you a check. If they issue you a check, it’s crucial that you transfer the
funds into a new 401(k) within 60 days, or else you’ll have to pay income tax on the distributed balance. Leaving your retirement savings with your old employer has its drawbacks. For example, you won’t be able to make any more contributions to the account, and you may also not be able to take out a loan on your 401(k). Your old employer may also charge administration fees on the account now that you’re no longer an active participant. Additionally, you’re still locked in to the funds that plan offers, which may be limited and expensive. For these reasons, many people — particularly those new to the workforce — choose to roll over their 401(k) to their new employer. Option 2: Roll Over Your 401(k) To Your New EmployerThe most common route people take is rolling over their 401(k) to their new employer. Typically, this is done through a direct transfer or having your employer automatically transfer your 401(k). Alternatively, you may opt for your employer to mail you a check for you to manually deposit into your new 401(k). The 60-day rule applies again here: If the funds aren’t deposited into a new 401(k) after this time, you’ll pay income tax on the entire balance. Before transferring your funds to a new 401(k) plan, make sure you understand your new plan’s rules, fees, and investment options. Look into your new company’s 401(k) matching program, if there is one. Make sure you’re making the most of your new 401(k) plan by knowing all your options and seeing if your new plan is better or worse than what was available at your previous employer. Option 3: Roll Over Your 401(k) Into an IRAInstead of keeping your funds in a 401(k), you may also choose to roll over your plan into an IRA. You’ll do this with a bank or brokerage firm separate from your employer. This is a common choice for people who are leaving the workforce or for those who don’t have an employer that offers a 401(k) plan. The main benefit of an IRA versus a 401(k) is more flexibility in withdrawing money penalty-free before reaching the age of 59 ½. You also have direct access and more control over your investment options. You may have other investments and can now move this money to the same brokerage so that everything is in one plan, which consolidates logins. If you choose to withdraw money from a rollover IRA, it may be used for a qualifying first-time home purchase (up to $10,000) or higher education expenses in addition to the exceptions for 401(k)s. The drawbacks of an IRA is that you’ll lose some hardship distribution options as well as “qualified” status, which means less protection of your assets. For example, if you were to be sued, some states would allow money in IRAs to be collected — but not if it was in a 401(k). Option 4: RetireIf you’re over the age of 59 ½ and decide to retire after leaving your job, you may start taking qualified distributions from your 401(k) or IRA without being charged an early penalty fee. Your distributions will, however, be taxed at your normal income tax rate. If you are over 55 but not yet 59 ½, you may take penalty-free distributions from your 401(k) but not an IRA. However, this is only valid if you’re accessing the 401(k) from your current employer. If you left your 401(k) with a previous employer, you’ll need to wait until you’re 59 ½. If you’d like to make withdrawals from your 401(k) after you’ve turned 59 ½ but are not yet retired, check with your employer’s plan to see if you’ll be penalized. Once you turn 72, you’ll be forced to take required minimum distributions (RMDs). If you fail to take your RMDs — or do not take out enough — you’ll be charged a whopping 50 percent penalty. This means if you were supposed to take out $2,000, the IRS will take $1,000. The IRS created the RMD rule to ensure tax is paid on 401(k) and IRA accounts when the money is withdrawn. Option 5: Cash OutYou can, of course, cash out your 401(k) when you quit or leave a job. However, this isn’t typically advised for a number of reasons. When you cash out your 401(k) before the age of 59 ½, you’ll be required to pay income tax on the full balance as well as a 10 percent early withdrawal penalty and any relevant state income tax. So, for example, if you cash out $10,000 from your 401(k) and you’re in the 22 percent federal tax bracket, you’ll pay a total of $3,200 in taxes and penalty fees. That’s nearly a third of your savings — and that doesn’t even take into account possible state income tax. As long as your funds are in your 401(k), they are creditor-protected, meaning the money is safe in the event that you’d need to file for bankruptcy. Once you cash out, your money can now be sought after by creditors and bankruptcy courts, so don’t cash out if you think you may need to file for bankruptcy. Additionally, when you cash out your 401(k) early, you opt for instant gratification while robbing your older self of potential growth on investments. Your retirement funds are meant to be there for you when you need them later in life. Only withdraw if absolutely necessary — after careful consideration — with your future self’s income in mind. Saving for retirement is something to take very seriously. When you quit your job, you have a variety of options. It’s up to you and your financial advisor to decide the best fit for your unique situation. Careful planning and diligent saving are key to putting your mind at ease and fully enjoying your retirement. 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I quit my job can i cash out my 401k
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