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New Research Shows Retirees Are Bailing On 401(k)s Earlier
“People start taking lumpy withdrawals at age 59.5 because the [10%] tax penalty goes away,” he said. “There's a definite trend in people not sticking around in the plan.”
For qualified plans, e.g. 401(k)s, the penalty goes away if you separate from service the year you turn 55 (or later). (For example, quit your job at age 56, even to take another job, and you can tap into the 401k you left behind immediately without penalty.) Not recommended, but allowed without paying 10%. See, e.g. IRS Tax Topic 410 Pensions and Annuities.
Reply to @VintageFreak: Because they either don't understand their plan or the entire concept well enough to make an intelligent decision, or because they simply don't trust the existing financial system to preserve their investment for them. I've known plenty of people in both situations.
Reply to @Old_Joe: Or, as the article says down near the end, some of the withdrawals are to roll over into better, cheaper investments ... some 401ks I've heard an earful about from friends are pretty awful: mediocre investment choices or worse, combined with ridiculous fees.
I know of a few who only contributed at work to obtain the company match. For whatever reason, at 59.5 jerked the total out and blew the $$. Sad but true. What can ya say?
Reply to @VintageFreak: I could not read the article but I am not sure if this article is accounting in service rollovers as withdrawal. Many plans now have the option of in-service withdrawal or rollover option over a certain age.
I think it is perfectly OK to move the money to a better option or have it professionally managed with better options outside the 401k platform. I have moved all prior employer 401k plans last year to my Fidelity IRA/Roth IRA.
Reply to @Investor: I don't know what the rules and hoops are on transfers, rollovers, etc. out of the average 401k, but with IRAs, almost all trustee to trustee transfers require specific forms to be submitted with a medallion signature guarantee, which is not readily available in some places. For example, our bank doesn't offer them, and the credit union where we used to have an account requires a member to travel 50 miles round trip to the office in the next town to get one.
Therefore, our few major IRA moves have been via withdrawal/rollover, which is fine under IRA rules. If it's as onerous to effect a transfer (direct rollover) from most 401ks as it is from IRAs, I can imagine a lot of people would go the withdrawal route simply to move retirement investments. The article does mention this as a possible rationale for withdrawal.
A lot of people are cashing out 401Ks when older because they find it hard to get a job so they use it as an emergency savings account. It can make sense if they are in a low tax bracket, even with the penalty, especially if they were in a high bracket when they put the money in. Still not a good idea, but I can see why people do it. Many older people find it hard to get jobs since employers can work younger workers harder and their health insurance costs are far cheaper.
Comments
For qualified plans, e.g. 401(k)s, the penalty goes away if you separate from service the year you turn 55 (or later). (For example, quit your job at age 56, even to take another job, and you can tap into the 401k you left behind immediately without penalty.) Not recommended, but allowed without paying 10%. See, e.g. IRS Tax Topic 410 Pensions and Annuities.
I think it is perfectly OK to move the money to a better option or have it professionally managed with better options outside the 401k platform. I have moved all prior employer 401k plans last year to my Fidelity IRA/Roth IRA.
Therefore, our few major IRA moves have been via withdrawal/rollover, which is fine under IRA rules. If it's as onerous to effect a transfer (direct rollover) from most 401ks as it is from IRAs, I can imagine a lot of people would go the withdrawal route simply to move retirement investments. The article does mention this as a possible rationale for withdrawal.