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Retirement blunder: Raiding the 401(k)
Survey: many workers cash out plans when changing jobs, incurring penalties and losing savings.
July 25, 2005: 11:16 AM EDT
By David Ellis, CNN/Money staff writer

NEW YORK (CNN/Money) - Almost half of workers leaving their jobs are raiding their 401(k) accounts for cash when changing jobs instead of holding on to their retirement savings, according to a recent study.

The survey, conducted by Hewitt Associates, a global human resources services firm, revealed that 45 percent of 200,000 individuals participating in 401(k) plans, opted to cash out of the retirement plan after leaving their job.

"Our findings show that too many workers are not looking at their 401(k) savings as long-term in nature, but are instead using termination of employment as an opportunity to spend this money," said Lori Lucas, director of participant research at Hewitt Associates, said in a statement.

32 percent of those individuals surveyed kept their retirement savings in their current employer's 401(k) plan and the remaining 23 percent rolled their money over to an IRA or another retirement plan.

Besides forsaking a key source of retirement savings, individuals who cash out of their 401(k) before they are 59 1/2, are typically forced to pay taxes on that balance plus an additional 10 percent penalty.

The study also found that the age of the worker and the balance of the account were important factors for those employees who decided to cash out their savings plans.

About two thirds of employees age 20 to 29 cashed out of their 401(k) plan after changing jobs, while older workers tended to hold onto their savings.

72.5 percent of those employees with account balances under $10,000 raided their 401(k) savings, while cash out rates were significantly lower for those individuals with balances larger than $10,000.

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