The IRS collected more than $5 billion in 2011 from penalties incurred by taxpayers who withdrew money from tax-deferred retirement accounts before the age of 59 1/2. The people who pay the penalty include younger workers who switch jobs and don’t bother to roll over their accounts and older workers who believe they have no place else to turn.
Here is a painful analysis of the cost, over time, that individuals could pay by cashing out early from their 401(k), according to Bloomberg.
Unfortunately, many people are forced to cash out due to financial needs. But the important take away is to recognize the incredible power of compounding, and how much you would lose (ie not gain) by taking money out of your 401(k) when you change jobs. If the 30 year old in the Bloomberg graph left her $16,000 in the 401(k) (or rolled it into an IRA), it could grow to $182,000 by the time she retired 36 years later, assuming a 7% annual return.
Next week we'll take a look at some of the developments being proposed to increase financial literacy in public schools.