Human Capital & Careers

Training Needed: Many Hit with Withdrawal Taxes On Retirement Plans

Thirty percent take cash payments when they leave an employer, study finds.
CFO.com StaffMay 22, 2001

Here’s a reminder to employers to take special care to provide their employees with education and training in how to manage their retirement accounts when they leave a company.

A study by Putnam Invesments released today says Americans are getting hit with billions of dollars in taxes and penalties because they cash out of their retirement savings too soon, according to Reuters.

About 30 percent of retirement plan participants with balances in their accounts take cash payments when they leave their employers instead of rolling over the money into an option like an Individual Retirement Account, says the study by Putnam Investments, the Boston- based mutual fund arm of Marsh & McLennan Companies.

The study of 1,500 Americans also found that investors not yet eligible for retirement will yank $33 billion to $39 billion in cash from their 401k plans this year. That would result in $7.1 billion to $8.3 billion in taxes and penalties, Reuters reports.

At the same time, 43 percent of investors faced with the decision of whether to roll money over transferred the account balance into an IRA, while 19 percent left their money in a former employer’s plan. Ten percent shifted money into a new employer’s plan.

Investors must pay 15 percent to 39.6 percent in federal taxes for cashing out of their 401(k) plans early, Reuters notes. They must, in most cases, pay a 10 percent penalty if they are under age 55. Exceptions include a medical disability that requires an early withdrawal.

4 Powerful Communication Strategies for Your Next Board Meeting