Personal Budget Training: Cash out or roll over 401K?

Thursday, June 19, 2008

Cash out or roll over 401K?

With the changing economy and changing jobs, people are trying to figure out if they should cash out their 401K or roll it over to a new account.

My advice, definitely roll it over. Here's an example to illustrate why:

If you have $5,500 in a 401K and you decide to move on to another employer. Withdrawing the $5,500, you will pay 30% combined fed and state income tax plus 10% penalty, the taxes and penalty alone will cost $2,200, leaving only $3,300 for you.

But the taxes and penalties are only the tip of the iceberg.

If you had left that $5,500 alone to earn a conservative estimate of 8% over the next 30 years until retirement at age 65, it could have grown to $60,147, earning $54,647 in interest. So you have given up $54,647 in earnings.

Labels: 401K, money saving tip