Almost Half of All People Leaving a Company Take Cash from a 401k

A 2005 survey from the benefits consulting company Hewitt Associates indicates that almost 50% of all people who are leaving an employer take a cash distribution from the existing 401k plan.

A cash distribution is very different from a IRA rollover.  A rollover does not involve penalties or taxes--simply moving money from a 401k to an individual retirement account or IRA.  On the other hand, a cash distribution involves both taxes and early withdrawal penalties.

This is an amazing and disturbing statistic.  As discussed earlier, tapping into 401k funds for current spending is frought with pitfalls. 

In fact, it is considered by many to be a sort of cardinal sin of personal finance:

1. Investors face an automatic 10% early withdrawal penalty if they are younger than 59 1/2.
2. Because of IRS rules, employers have to hold back 20% of your account balance for taxes.
3. Retirement accounts are protected in the event that your company (or you) declare bankruptcy.
4. Most importantly, even if your account balance is relatively small, you're cheating yourself from years of compounding interest. According to the U.S. Department of Labor, workers will have to save three times as much per month for every 10 years they delay.

Source: Motley Fool

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