Like it or Not, Americans Are Cashing Out Their 401(k)s

Suze Orman is probably shooting out expletives at every turn with recent news that nearly half of unemployed Americans are withdrawing funds from their 401(k) plans. Experts spend a lot of time advising workers not to withdraw from 401(k)s because they take away from much needed retirement at the end of a career. But workers are doing it anyway, like it or not.

Why Are Unemployed Americans Withdrawing from their 401(k) Plans?

A recent study released by Hewitt Associates, a global human resources consulting firm, reported that 46 percent of employees who left their jobs last year took a cash distribution from their 401(k) plan. This number is based on 170,000 workers. While nearly this many workers have been withdrawing funds since 2005, it’s even more common now due to the troubled economy. Many workers would much rather take out funds to pay their mortgage or car payment (and put food on the table) than to lose their precious treasures. Who can blame them?

Drawbacks of Withdrawing 401(k) Funds

There are a couple of drawbacks to withdrawing funds or borrowing against your 401(k) plan prior to retirement, including:

• Reduced savings: If you withdraw some of your 401(k) now, you will have less growing in your plan for when you retire.
• Inability to retire: If you withdraw too many saved funds, you may not be able to retire when you’d hoped.

Alternatives to Withdrawing from Your 401(k)

There are definitely ways to avoid touching your 401k while unemployed, including rolling over to a Traditional or Roth IRA. If you want to avoid withdrawing your funds, there are government plans that you can consider, in addition to accepting unemployment benefits, to help you stay afloat.

However, if worse comes to worst, you may have to withdraw now and hopefully rebuild it along with taking on additional investment options at a later date.

Have you ever felt pressured to withdraw cash from your 401(k) plan?