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Flex Your 401(k): Don't Tap It

02/22/07 - 01:53 PM EST

Steve Viuker

Editor's note: As a special feature for Feburary, TheStreet.com offers a four-part series on 401(k) plans designed to help you maximize your retirement savings. Today is Part 3. Part 1 was on maximizing your contributions, and Part 2 was on asset allocation.

Need a new car? Want that great condo? Thinking about tapping your retirement savings? Think again.

While it might be tempting -- particularly when you leave a job -- to dip into your 401(k) plan, your future financial security relies not just on saving money in your employer-sponsored retirement account but also on leaving it there.

"These plans are designed to be retirement accounts, and the government is giving you tax benefits to use them as retirement accounts," says Stuart Ritter, a financial planner at T. Rowe Price. "So if you break that contract with the government and use them for something else, there will be penalties."

Yet an unsettling number of people do just that. According to a Hewitt Associates study of 2004 data, 45% of U.S. workers choose to cash out of their 401(k) plans when they leave their companies.

Younger workers were by far the worst offenders. Sixty-six percent of those ages 20-29 elected to cash out when they changed jobs. Employees who were older and more tenured were more likely to preserve their retirement wealth, either keeping the assets in their former employers' plans or rolling them over to qualified IRAs or other retirement accounts. Still, more than 42% of workers ages 40-49 elected to cash out of their 401(k) plans upon leaving their jobs.

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Steve Viuker is a business and finance writer based in Brooklyn, N.Y. He has been published in The New York Post, The New York Times and other national media outlets.

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