New Law Bans Cashing Out of 401K Funds

401k funds are a crucial part of retirement security for older individuals. There are three sources of income that retirees can rely on, namely 401k funds, social security, or private pensions. However, private pensions have declined over the past few decades, with many companies no longer offering them and even government agencies moving away from them due to budgetary constraints.

Social security, another important source of income for retirees, is also under pressure as the trust fund is running out of money. The government is concerned about the next decade, where there may not be enough money to go around, or cuts may have to be made to social security. Therefore, the government is looking to promote 401k funds as a reliable retirement-support platform.

However, it is often difficult to move money from one employer to another when switching jobs. If you leave a job and work somewhere else, your 401k fund has typically to be cashed out and then reopened somewhere else, which can lead to people spending the money before putting it into a new employer’s account. To prevent this from happening, the government is considering passing laws that make 401k funds portable from one employer to another rather than cashing them out.

This change is designed to keep the balance high in 401k funds and prevent the government from being pressured later to provide social security or other resources for retirees. With more people switching jobs frequently, it is easy to be tempted to spend 401k money when closing out or cashing out the fund, especially during a gap between jobs or when moving residences. The government hopes that making 401k funds portable will reduce the temptation to spend them and ensure that individuals have a reliable source of retirement income regardless of their employment status.