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Yahoo
4 days ago
- Business
- Yahoo
Here's why an alarming number of workers cash out 401(k) plans
A 401(k) retirement account is supposed to be hands-off. It's not your money, in theory, but savings for the future you. And yet, when Americans leave jobs, one-third of them cash out their 401(k) accounts. That's called 401(k) 'leakage,' and it costs workers untold billions of dollars in lost retirement savings. In a recent paper, Vanguard ponders why so many Americans liquidate retirement accounts when they exit jobs – about 33%, by their estimate -- and what employers and employees can do about it. The 401(k) was designed to help American workers build retirement savings, using tax breaks as an incentive. Nearly $9 trillion sits in 401(k) accounts nationwide, according to the Investment Company Institute. Half of all private-sector workers now participate in the plans, a record high. But 401(k) dollars don't always end up funding someone's retirement. At least $1.7 trillion sits in lost or forgotten 401(k) accounts, according to research by Capitalize, a financial services firm. A new Vanguard research note focuses on another problem: Workers cashing out retirement accounts when they leave jobs. Cashing out a 401(k) is often the worst option When you depart a job, you have several options with a 401(k). You can do nothing, keeping the money in the account. You can execute a 'rollover,' transferring the funds to another 401(k) or Individual Retirement Account. Or, you can cash out. And if you're exiting a job, a cashout might sound alluring. You may not have another job lined up. Perhaps you're planning a move. Maybe a new child has arrived. 'It can be very tempting. You're having this big decision in your life,' said Rob Williams, managing director of financial planning at Charles Schwab. 'Especially if it's not a large amount, your first instinct is to take the money.' But cashing out a 401(k) is generally the worst option, at least in financial terms. If you liquidate a 401(k) before age 59 ½, you generally pay income taxes on the amount, plus a 10% penalty for early withdrawal. Moreover, you miss out on the chance to collect years of compounded returns on your 401(k) investments. If you cash out a $7,000 retirement account at age 40, you may net as little as $4,270 in actual cash to spend, after penalties and taxes, Fidelity estimates. But if you leave the same $7,000 invested for 20 more years, and the investments increase at an annual rate of 8%, the sum will grow to nearly $35,000, according to a NerdWallet calculator. 'You think it's a small amount of money. You take it out. But if it stayed invested, it could have grown to a much larger sum,' said Anqi Chen, associate director of savings and household finance at the Center for Retirement Research at Boston College. Why do departing workers cash out their 401(k)s? Exiting workers cash out 401(k) accounts for several reasons, retirement experts say. Vanguard researchers theorize that financial need, more than anything else, drives workers to liquidate retirement accounts. Hourly workers are more likely than salaried employees to cash out 401(k)s. The reason, Vanguard says, may be that hourly workers have more income fluctuations. Those ups and downs can leave them short of cash. Workers with lower incomes are more likely to cash out than those with higher incomes. That data point, too, suggests financial need. 'It's really short-term cashflow liquidity challenges that are explaining a lot of these early withdrawals,' said Aaron Goodman, an economist at Vanguard. Vanguard found that workers with emergency savings were much less likely to cash out a 401(k) when leaving a job. Thus, Vanguard urges workers to save for emergencies. Even $2,000 in rainy-day funds, researchers found, allowed workers to leave jobs without raiding retirement funds. Employees are also much more likely to cash out a 401(k) account with a small balance. The typical cashout involves 'a few thousand dollars,' Goodman said. Some workers, especially younger workers, cash out retirement accounts because the sum seems too small to bother with. 'It's easy for them to fall into this mindset, 'It's not a lot of money,'' said Mike Shamrell, vice president of thought leadership at Fidelity Investments. 'If you do that every other year in your 20s, that starts to add up.' Rolling over a 401(k) can be 'incredibly hard' Cashing out a 401(k) is relatively easy. Rolling it over into another retirement account, by contrast, can be 'incredibly hard,' said Chen of Boston College. That's another reason why many workers cash out retirement plans. In a rollover, you move your retirement savings to another 401(k) account at your new company, or into an IRA, a personal retirement savings account. Rollovers can get complicated, especially when the funds are going into a new 401(k) account managed by a different firm. Research by Capitalize, a retirement savings platform, found rollovers 'outdated and painful': Only 22% of savers managed to roll over an account without help, and 42% said the process took them at least two months to complete. In many cases, rollovers involve laborious forms and old-fashioned paper checks. Some employers encourage departing workers to cash out low-balance retirement accounts, "just because it's easier for them," said David John, a senior strategic policy advisor at the AARP Public Policy Institute. The ability to move a 401(k) from one employer to the next is called 'portability,' and the lack of it has thwarted workers from preserving retirements savings, according to Chen and others. When exiting employees contemplate rolling over a 401(k) account, 'they're just a little bit overwhelmed by the process,' said Shamrell of Fidelity. 'They feel it's going to be time-consuming and complex.' A recent initiative in the retirement-savings industry aims to solve the portability problem. In 2022, a consortium of private retirement-plan providers announced a collaboration to boost the portability of small retirement accounts. When someone leaves a job, the network of providers will make sure that retirement funds 'move seamlessly from one job to another,' said John of AARP. The auto-portability program applies to accounts valued at $7,000 or less, which are more likely to be cashed out or forgotten. Most big retirement-plan providers participate in the effort. 'I do think there's an evolution, as there should be, in terms of making this more of a point-and-click exercise,' said Williams of Schwab. This article originally appeared on USA TODAY: Workers cash out 401(k)s at an alarming rate. Why? Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
USA Today
6 days ago
- Business
- USA Today
Here's why an alarming number of workers cash out 401(k) plans
A 401(k) retirement account is supposed to be hands-off. It's not your money, in theory, but savings for the future you. And yet, when Americans leave jobs, one-third of them cash out their 401(k) accounts. That's called 401(k) 'leakage,' and it costs workers untold billions of dollars in lost retirement savings. In a recent paper, Vanguard ponders why so many Americans liquidate retirement accounts when they exit jobs – about 33%, by their estimate -- and what employers and employees can do about it. The 401(k) was designed to help American workers build retirement savings, using tax breaks as an incentive. Nearly $9 trillion sits in 401(k) accounts nationwide, according to the Investment Company Institute. Half of all private-sector workers now participate in the plans, a record high. But 401(k) dollars don't always end up funding someone's retirement. At least $1.7 trillion sits in lost or forgotten 401(k) accounts, according to research by Capitalize, a financial services firm. A new Vanguard research note focuses on another problem: Workers cashing out retirement accounts when they leave jobs. Cashing out a 401(k) is often the worst option When you depart a job, you have several options with a 401(k). You can do nothing, keeping the money in the account. You can execute a 'rollover,' transferring the funds to another 401(k) or Individual Retirement Account. Or, you can cash out. And if you're exiting a job, a cashout might sound alluring. You may not have another job lined up. Perhaps you're planning a move. Maybe a new child has arrived. 'It can be very tempting. You're having this big decision in your life,' said Rob Williams, managing director of financial planning at Charles Schwab. 'Especially if it's not a large amount, your first instinct is to take the money.' But cashing out a 401(k) is generally the worst option, at least in financial terms. If you liquidate a 401(k) before age 59 ½, you generally pay income taxes on the amount, plus a 10% penalty for early withdrawal. Moreover, you miss out on the chance to collect years of compounded returns on your 401(k) investments. If you cash out a $7,000 retirement account at age 40, you may net as little as $4,270 in actual cash to spend, after penalties and taxes, Fidelity estimates. But if you leave the same $7,000 invested for 20 more years, and the investments increase at an annual rate of 8%, the sum will grow to nearly $35,000, according to a NerdWallet calculator. 'You think it's a small amount of money. You take it out. But if it stayed invested, it could have grown to a much larger sum,' said Anqi Chen, associate director of savings and household finance at the Center for Retirement Research at Boston College. Why do departing workers cash out their 401(k)s? Exiting workers cash out 401(k) accounts for several reasons, retirement experts say. Vanguard researchers theorize that financial need, more than anything else, drives workers to liquidate retirement accounts. Hourly workers are more likely than salaried employees to cash out 401(k)s. The reason, Vanguard says, may be that hourly workers have more income fluctuations. Those ups and downs can leave them short of cash. Workers with lower incomes are more likely to cash out than those with higher incomes. That data point, too, suggests financial need. 'It's really short-term cashflow liquidity challenges that are explaining a lot of these early withdrawals,' said Aaron Goodman, an economist at Vanguard. Vanguard found that workers with emergency savings were much less likely to cash out a 401(k) when leaving a job. Thus, Vanguard urges workers to save for emergencies. Even $2,000 in rainy-day funds, researchers found, allowed workers to leave jobs without raiding retirement funds. Employees are also much more likely to cash out a 401(k) account with a small balance. The typical cashout involves 'a few thousand dollars,' Goodman said. Some workers, especially younger workers, cash out retirement accounts because the sum seems too small to bother with. 'It's easy for them to fall into this mindset, 'It's not a lot of money,'' said Mike Shamrell, vice president of thought leadership at Fidelity Investments. 'If you do that every other year in your 20s, that starts to add up.' Rolling over a 401(k) can be 'incredibly hard' Cashing out a 401(k) is relatively easy. Rolling it over into another retirement account, by contrast, can be 'incredibly hard,' said Chen of Boston College. That's another reason why many workers cash out retirement plans. In a rollover, you move your retirement savings to another 401(k) account at your new company, or into an IRA, a personal retirement savings account. Rollovers can get complicated, especially when the funds are going into a new 401(k) account managed by a different firm. Research by Capitalize, a retirement savings platform, found rollovers 'outdated and painful': Only 22% of savers managed to roll over an account without help, and 42% said the process took them at least two months to complete. In many cases, rollovers involve laborious forms and old-fashioned paper checks. Some employers encourage departing workers to cash out low-balance retirement accounts, "just because it's easier for them," said David John, a senior strategic policy advisor at the AARP Public Policy Institute. The ability to move a 401(k) from one employer to the next is called 'portability,' and the lack of it has thwarted workers from preserving retirements savings, according to Chen and others. When exiting employees contemplate rolling over a 401(k) account, 'they're just a little bit overwhelmed by the process,' said Shamrell of Fidelity. 'They feel it's going to be time-consuming and complex.' A recent initiative in the retirement-savings industry aims to solve the portability problem. In 2022, a consortium of private retirement-plan providers announced a collaboration to boost the portability of small retirement accounts. When someone leaves a job, the network of providers will make sure that retirement funds 'move seamlessly from one job to another,' said John of AARP. The auto-portability program applies to accounts valued at $7,000 or less, which are more likely to be cashed out or forgotten. Most big retirement-plan providers participate in the effort. 'I do think there's an evolution, as there should be, in terms of making this more of a point-and-click exercise,' said Williams of Schwab.
Miami Herald
23-07-2025
- Business
- Miami Herald
Jean Chatzky sends strong message on 401(k)s, IRAs
Many Americans planning for retirement are often encouraged to start by contributing to both a company-sponsored 401(k) plan and an Individual Retirement Account (IRA) as major parts of their financial strategy. Former NBC Today Show financial editor Jean Chatzky offers a key data point on U.S. household retirement savings progress and explains some important things to know about the 401(k) and IRA challenge facing Americans. Don't miss the move: Subscribe to TheStreet's free daily newsletter Individuals should consider placing a high priority on contributing to an employer-sponsored 401(k) - especially when matching contributions from the company are available, the HerMoney founder explained. With automatic deductions taken directly from paychecks, Chatzky clarified, this approach requires minimal effort and decision-making, offering a streamlined and effective path to retirement savings. In Chatzky's July 22 HerMoney email newsletter, she explained why one important number regarding IRAs is 44%. "That's the percentage of U.S. households saving for retirement through IRAs – accounts that hold over $16.2 trillion and make up 38% of all U.S. retirement wealth," Chatzky wrote, citing an Investment Company Institute report. "No IRA, you say?" she asked. "For many women, these accounts are key to closing the retirement savings gap." Jean Chatzky describes gap annuities as a financial tool crafted to bridge the income divide that can occur between leaving the workforce and the start of other retirement benefits, such as Social Security or a pension. Gap annuities can also help delay the time when a person would otherwise make withdrawals from their 401(k) plans and IRAs. These short-term annuities - generally lasting between three and ten years - are typically funded through a lump sum or a series of payments. In return, they offer reliable income over a defined period. Chatzky likens them to a substitute paycheck, providing a steady cash flow for retirees - or anyone experiencing a temporary break in earnings. More on personal finance: Dave Ramsey warns Americans on Social SecurityJean Chatzky sends strong message on major 401(k) changesFinance expert has blunt words for car buyers Who gap annuities are good for In the HerMoney newsletter, Chatzky describes the financial situations that make sense for when people should consider gap annuities. Early retirees who want to wait to start collecting Social Security in order to maximize their monthly who are waiting on a pension or another delayed income who need income before their required minimum distributions (RMDs) begin at age 73 or 75, depending on your birth year. Retirees without pensions who want to turn part of their retirement nest egg into a steady income stream – basically creating their own DIY pension. "Unlike lifetime annuities, gap annuities are time-limited, making them more flexible and often less expensive," Chatzky wrote. "As with all financial products, make sure you read the fine print - watch out for fees, surrender charges and whether or not the income keeps up with inflation," she added. Chatzky has explained her approach to investing in retirement savings accounts, even in times of volatility in the market. "I'm always buying," she said. "I think I'm very much the typical retirement investor. I put money into the markets in my 401(k) and other retirement accounts and brokerage accounts on a regular basis in a very methodical way." Chatzky has emphasized the fact that she typically avoids investing in individual stocks, preferring a more diversified approach through mutual funds. While she views stock-picking as an occasional source of enjoyment, her main strategy involves staying the course with long-term investments. Chatzky also outlined another method she believes can support investors during market downturns, aimed at helping people maintain their financial footing when stock values dip. Related: Jean Chatzky warns Americans on a slick Roth IRA retirement move "You should always try to have enough in bonds and cash that you could prevent yourself from having to sell when stocks are really down," Chatzky has said. "Other than that, I think we really can't control these things." The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
Yahoo
04-06-2025
- Business
- Yahoo
Local delegation reviews recent legislative session
Jun. 4—The Morgan County legislative delegation reviewed Tuesday morning the bills and the roughly $80 million in appropriations for local projects approved in the state Legislature's spring session that ended May 14. The Decatur-Morgan County Chamber of Commerce sponsored this annual Legislative update breakfast at the DoubleTree by Hilton Decatur Riverfront. As chairman of the Finance and Taxation Education committee, state Sen. Arthur Orr, R-Decatur, said that after the difficult financial years of 2011 and 2012, the pendulum has swung back so that the state has "ample revenues." Orr said that allowed the state Legislature to make tax cuts and rebates in 2023 and then reduce the grocery tax by another penny this session to 2%. "If there is money we can send back to the people, I think this delegation and the Legislature are united on that front," Orr said. He said they still had record $3.7 bill General Fund and $10 billion Education budgets for fiscal 2026. Orr talked about the roughly $80 million local appropriation, which he said started his office but passed because the four House representatives in the Morgan County delegation. "If it weren't for these representatives defending and fighting for these projects, they would have been left on the cutting room floor," Orr said. Orr cited $9.5 million for the STEAM Imagination Center at the Cook Museum of Natural Science, $7.5 million for turning the Harris-Caddell Law Firm Building into a library for the Alabama Center for the Arts, $1.7 million for the Horton Legal Learning Center and more. Among the other projects to receive funding are $1 million for a Wheeler Wildlife Refuge trail along Alabama 67; $3.2 million for a culinary arts center as part of the Alabama Center for the Arts; $1 million to expand the Carnegie Visual Arts Center; $100,000 for repairs to the Old State Bank; and $1.4 million for the Somerville Courthouse. "I'm excited about the good things happening in this county because for far too long I don't think we saw a whole lot of help from Montgomery," Orr said. Orr added that he's working on getting a third bridge over the Tennessee River "and other things." House Majority Leader Scott Stadthagen, R-Hartselle, credited Orr and his leadership as budget chairman for bringing the money to Morgan County. "All the things he's talking about wouldn't on this list if he wasn't in the position where he's at," Stadthagen said. The delegation then talked about bills that passed and didn't pass. The legislature didn't extend the exempted hourly overtime earnings originally approved in 2023. Rep. Parker Moore, R-Hartselle, said they found other ways to replace this exemption "that was a lot more expensive and inclusive." They passed House Bill 388, which doubles the state's income tax exemption from $6,000 to $12,000 for individuals 65 years old or older who withdraw funds from a defined contribution retirement plan such as a 401(k) or Individual Retirement Account. The change takes effect on Jan. 1, 2026, at an estimated cost of $45 million. House Bill 389 also passed with a focus on tax relief for lower-income Alabamians. It raises the standard deduction from $2,500 to $3,000 for individuals and expands dependency exemptions beginning with the 2026 tax year. "We opened up avenues for retirees and low-income workers. What we tapped has more potential to help a broader range of people," Moore said. Moore said they cut the sales tax on groceries in half, with the ultimate goal of cutting to zero. "That's about $237 at minimum that people are saving on grocery tax, so that's a major impact," Moore said. Rep. Terri Collins, R-Decatur, sponsored a rural hospital investment program that she said doesn't impact this area but should help health care in other areas of the state. Collins said this program would save hospitals like Lawrence County Medical Center, which closed in February before it could be eligible for the funds. "We're trying to give them a lifeline of something that worked in Georgia very successfully," she said. Stadthagen talked about the legislation that passed to help independent pharmacies, which he said are struggling to stay open. He said nearly 20 pharmacies shut down in the past year. The bill requires minimum reimbursement rates to community pharmacists. Rep. Ernie Yarbrough, R-Trinity, said a cousin who owns four pharmacies explained the situation. He said this evens the playing field for independent pharmacies. "Basically, from a 20,000-foot view, you have business model where you're required to sign contracts with certain prices you can't talk about and you're required to operate at a loss," Yarbrough said. "So, this requires independent pharmacies not to operate at a loss because it's not sustainable." "It's not the total answer because we need the federal government to do its part, but I believe we, at the end of the day, did our part," Stadthagen said. Collins, chairwoman of the Education Policy Committee, said they passed a bill that bans cellphones from K-12 students in schools. There are exceptions for some students with special needs, cellphone use under the supervision of school staff and in life-threatening emergencies. "I think it's the best thing we can do for school safety," she said. Collins said several school resource officers told her that eliminating cellphone from school helps mental health by reducing issues like suicide, self-harm rates and bullying. Stadthagen said he was against this bill initially because of his 12-year-old daughter but police officers convinced him to change his vote. "They were concerned that cellphone could clog the phone lines with mixed messages during emergency," he said. Collins said Montgomery County banned cellphones two years ago and found that it worked. "After the first month where everybody had to adjust, their achievement and their student scores started increasing at a great rate, and their discipline problems started decreasing," Collins said. Orr said they put in place a new "student-based funding formula" for schools with a fund put in place several years ago that's now up to $1 billion. Previously, school funding was based on the number of students at a school. Now there's a "special pot" that funds the additional cost for educating a special needs child, an English language learner, a child in poverty and a gifted child, Orr said. "You'll see a lot more money going to Decatur City and Morgan County schools," Orr said. "You won't see as much on a percentage basis in Hartselle schools, but it will be more." Orr said there is an accountability factor in the approved bill that requires schools to show academic improvement or possibly lose this additional money in seven to 10 years. Another new law Orr sponsored requires that beginning in the 2026-27 school year, all students receive instruction in the success sequence: graduate from high school, get a job and get married before getting pregnant. The law required instruction on this sequence at least twice before students graduate from high school. Orr said 96% of people who follow this sequence in the first 10 years after high school are successful. He said schools will start with middle school students when they're young enough that they will listen to these lessons. "That's a 4% failure rate," Orr said. "And I worry about our state and our young people." Orr said he also sponsored an approved bill that allows a junior or senior in high school to start their credit production in college if admitted. "If they're ready to leave high school, let them go on," Orr said. "Obviously, they will get into the workforce sooner and not just hang out in high school waiting on the clock, waiting on their senior year." — or 256-340-2432
Time Business News
07-05-2025
- Business
- Time Business News
Things to Ponder When Opening a Roth IRA Account
Source: Opening a Roth IRA, also known as an Individual Retirement Account, can be a crucial step in securing your financial future. The distinct tax advantages that retirement savings plans offer can help your money grow with the passage of time. This financial growth makes a Roth IRA an attractive option for a wide range of investors. Before opening a Roth IRA account, several key factors that you need to consider… Discover five points of consideration to ensure that you're making the right moves toward your financially secure retirement life. First, it's essential to know and understand the income limits set by the IRS. If you're looking to contribute fully to a Roth IRA, your modified adjusted gross income (MAGI) must fall below certain thresholds. This can vary based on your tax filing status (single, married filing jointly, etc.). If your income exceeds these limits, your ability to contribute may be reduced or eliminated. So, it's wise to confirm your eligibility before making the next move. Choosing a reliable financial institution, such as SoFi, to open your Roth IRA can significantly impact your investment experience. Before you make a choice, compare various providers depending on factors, which include: fees, available investment options, customer service, and account management tools. It's wise to schedule an initial consultation with your prospective service providers. That's when you can enquire about their legitimacy, how to open a Roth IRA account, and their customer testimonials. Always choose a reputable provider that offers educational resources to help you make informed decisions about your investments. Another significant step is to familiarize yourself with the annual contribution limits for Roth IRAs. For the year 2023; The maximum contribution is $6,500 for individuals under 50 The maximum contribution is $7,500 for those aged 50 & over, known as the catch-up contribution. Be mindful that these limits are subject to change. That's why you need to stay updated on IRS announcements, which are necessary for planning your contributions more effectively. Roth IRAs offer individuals a variety of investment options; some of them are as follows: stocks, bonds, mutual funds, and ETFs. Just you need to identify and understand what your risk tolerance and investment goals are. This understanding will empower you to select the right mix for your portfolio. What's more, consider whether you want to manage these investments yourself or prefer a more hands-off approach via a managed account. This can have a significant impact on your returns over time. Tax-free withdrawal of your contributions at any time and without any penalty is another standout feature of a Roth IRA. However, if you are looking to take advantage of tax-free withdrawals of earnings, you must meet specific conditions, such as: Condition #1: You must be at least 59½ years old and You must be at least 59½ years old and Condition #1: You must have the account open for at least five years. When you become aware of these rules or conditions, you can plan your retirement strategy more effectively. Not just that, you can also prevent penalties. TIME BUSINESS NEWS
