Jobless Might Turn to 401(k) Despite Penalties

March 18, 2002 ( - Even though they know that early withdrawal of their retirement savings triggers both taxes and possible penalties, a third of workers would still tap their 401(k) or IRA if they lost their job, a new survey found.

According to the survey from American Century conducted earlier this month, virtually every respondent knew about the taxes and penalties, but 32% confessed they would still head for their retirement savings account if times got tough. A retirement plan withdrawal before age 59 ½ generally triggers a 10% early-withdrawal penalty, as well as a 20% withholding.

The good news from the American Century study was that two thirds of employees vowed to leave their 401(k) or IRA alone even if they were jobless.

Half of the survey respondents have either an employer-sponsored retirement plan like a 401(k) or any type of IRA with college graduates between 25 and 64 with at least a $35,000 annual income the most common retirement account holder.

Financial advisors generally counsel retirement savers to keep their account balances tax deferred as long as possible – even if that means rolling a 401(k) balance into an IRA or into another employer’s qualified plan.
Tapping into that money too early simply heightens the possibility that workers won’t have enough on which to retire when they reach retirement age, financial advisors say.

The study, What Laid-Off Workers Would Do With Retirement Savings – March 2002, was conducted March 7 through March 10, 2002 through interviews with 1,007 adults.