When it is time to rollover your 401k investments into a new account, taking a cash distribution can seem very enticing. The fact is, and here comes the brutal truth, unless you desperately need money now or are at the age of 59 ½ you would be mad to cash out! I know that it is the most tempting option but it also is the most costly. Here’s why.
If you choose to leave your currently employer and ask to receive a portion, or all of your 401k savings, this is what is considered a cash distribution. The thought may pop into your head that this is your money so you should be able to have it and do what you please. The truth to that is yes, you can, however the tax man is going to make you pay dearly for it. Essentially if you were to take cash in hand, you will pay a mandatory 20% withholding tax and may also pay a premature distribution pentaly at 10% if you are under the age of 59 ½. Bet you were wondering why i mentioned that before.
As you can see, that’s quite a bit of money you will be paying out all in one lump sum as opposed to a direct rollover where your money will continue to grow.The only real benefit to cashing out is that you have cold hard cash in your hands. This is only a good situation if you are in dire need for cash. By dire I mean you have medical bills that must get paid, or you are in danger of losing your home. Dire need does not mean you need a new shoe collection or motorcycle. This option is not something that should be considered lightly. It may seem great to have all this money in hand, but how will you rebuild your retirement? If you are close to retirement, like in your 50’s you may want to really think twice, or even three times about whether this is the right choice.
Here are a few things to remember:
- Cashing out should only be an option if you are in a financial bind.
- The tax man will take a lot of your money
- Think about what you can do to rebuild your retirement if you choose to cash out
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