Should I Have Cashed Out or Rolled Over My 401(K)?

Day 296 of my Financial Freedom Countdown

One of my biggest regrets during my first financial crisis is pulling money out of my 401(k). I wish I still had all the money today. However, even if I still had it, I would probably be tempted to pull it out again to pay off debt. If you are feeling the same temptation, tell Satan to get behind you right now.

Do not cash out your 401(k) unless you are retiring. One out five employed U.S. citizens have made this same mistake and now have loans against their 401(k) funds. If you make a withdrawal from your 401(k) it will result in major taxes and penalties. Most people who withdraw early end up with half as much as they originally had. I actually ended up with none.

I had at one time over $50,000 in my 401(k), but had pulled it out to pay off credit card debt. On average most American employees have $33,000 in their 401(k) at age 30. Now most financial planners would tell you that amount would turn into over $500,000 when you reach 65. Granted that you earn an average of 8-12%. So, with me having $50,000, imagine what I would have in another 30 years.

However, using the $33,000 as an example, $33,000 would end up being worth more like $18,000 after taxes and penalties. In my case, the rest of my debt had been eliminated, but my 401(k) was wiped out and I ended up paying $15,000 in income tax. Unfortunately, most people like me cash out their 401(k) when they are laid off.

If you are laid off, do everything you can to avoid the temptation of withdrawing from your 401(k). When you do go back to work, some employer 401(k) plans will allow you to re-invest your old 401(k) into your new one, but if not, you should roll your 401(k) into an IRA. I know you may busy getting adjusted on your new job and whatever else life throws at you, but you must make the roll over a priority.

Use me as an example and do not cash out your 401(k) and pay 40 percent in taxes and penalties. Do what you have must to roll it in an IRA and leave it until you retire. Fill out the roll over paperwork. Thirty minutes of your time is worth it. If not, $100,000 or more is all you have to lose. You decide.

Photo Via (401khardshipwithdrawal.com)

[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).]

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