Prepare for the Future, Keep Your 401(k)!

You're thinking, what 401(k)? Well, if you don't have a current 401(k) you will have one when you land your first job after graduation, or at least lets hope you do! Anyways, I read an interesting article about what many people are doing when they switch from one job to the next, they are cashing out their 401(k)s! The article mentioned that this type of action is common among employees in their twenties and early thirties, but now there is a large majority of individuals in their forties who are cashing out their 401(k)s! Are they stupid? If someone decides to cash out a 401(k) before they are 59.5 years old they will be required to pay a 10% penalty payment to Uncle Sam and a large amount of taxes due on pretax contributions. Try to swallow this, there is a good chance that the person who cashs out their 401(k) will end up losing up to 35% right off the top of whatever he or she has in the plan! No matter how small or how large your 401(k) is, no matter if you are 25 or 45, don't be tempted by the quick cash of cashing out. If you can fight the temptation, you'll have so much more money when the fun part of life comes... retirement!


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Tyler said...

I don’t think that cashing out your 401(k) when there is quite a bit of equity build up; no matter the age is a responsible move. Although, when you only have a small amount of equity in the 401(k) there are certain instances that cashing out your retirement plan could lead to a better investment for a later time. At my last place of employment I watched every person that quit cash out their 401(k) because the retirement options that were offered were not worth the cost of leaving the money in the account. With the employees new occupations they felt that by taking the penalty on early withdrawals they would make the money back in the better retirement package. I would say to carefully review your situation with your retirement portfolio before making any drastic changes.

Dr. Tufte said...

This is sound advice (and I am someone who had to cash out some 401K money to help support a family member).

For the confused, the 35% figure comes from the idea that the 10% you lose now would have compounded. So, you're only losing 10% now, and 10% of what you ultimately have, but since the latter is larger you are throwing away about a third of the money you already put in.