I Need Money! Should I Cash Out My Retirement Plan?

frustrationThe financial news seems to be all gloom and doom these days. The reports are that we’re not in a recession, but times are tough for a lot of people.

No matter how tight things get, we still have bills to pay. People are responding to this very intelligently. They’re turning to public transportation, eating out less, seeking cheaper forms of entertainment, and cutting back on unneeded items.

But what do you do if that isn’t enough?

Tapping your retirement plan …

It’s tempting to pull money out of your retirement plan, like a 401(k), especially if you change jobs. In fact, about 40 percent of job changers in their twenties and thirties have done just that, according to a recent report by the Financial Industry Regulatory Authority (FINRA).

… could cost you $130,000 …

If you’re under 59½, it’s usually not a good idea to cash out your retirement plan. Let’s look at the example that FINRA used:

You’re 30-years old with $20,000 in your 401(k). If you earn just 6% on that money until you retire at 62, you’ll have nearly $130,000 in your account, without making any additional contributions.

… and then some!

Of course, you can start over. But you lose the power of money compounding on top of money on top of more money, all accumulating tax free until you take it out. So it’s like taking at least two steps backward.

But that’s not all. Here are 4 other steps back:

  • You’ll have to pay income taxes out of this money, since it was invested pre-tax.
  • There’s also a 10 percent penalty for early withdrawal (unless you’re over 59½)
  • Your employer is required to withhold 20 percent toward income taxes.
  • If you owe money, your creditors can’t touch your 401(k) unless you cash it out.

By the time you get a check, that $20,000 will probably be more like $14,000 net of everything. So cashing out of your retirement plan is a short-term solution with long-term consequences. 

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(Image by nighthawk7)

12 replies
  1. Ken Pirok
    Ken Pirok says:

    As far as these steps back go:

    The income tax and the income tax withholding are kind of the same thing. The 20% income tax withholding will count toward the income tax that you would owe next spring.

    BUT, there’s another step back: If your 401k $ is in the stock market, then it’s probably a really bad time to sell. The major indices (Dow, S&P 500, etc.) are in the ballpark of 20% below their highs just last year. The idea is to buy low and sell high, not the other way around.

    If there’s any way you can borrow, then you’re probably better off. Even if you can’t borrow, the comment above that your creditors can only get your 401k money if you do cash out is crucial.

    Reply
  2. steven wood
    steven wood says:

    How do I cash out my retirement plan (from a company I worked for for 17+ years, and I am over 58 years old) instead of receiving a monthly payment? I was terminated from that job in 1999, but only learned that I had money coming from that company 6 weeks ago. I am currently working at another company.

    Do you have any advice on this. I would like to discuss this with someone ASAP. Perhaps you might have some suggestions.

    Thank you.

    Reply
  3. HECTOR MANUEL PAGAN SERRANO
    HECTOR MANUEL PAGAN SERRANO says:

    Your article is really interesting but in my opinion is also very misleading. Why? You claim that people are thinking and going about the hard times in intelligent ways. You speak about people eating out less etc. That is also obvious in regards to hard times but what you failed to disclosed is two things. People eating less out means lost of jobs in many sectors. The restaurant business unlike many people think is more than just food and involves a huge spectrum or related restaurant and food businesses. That means if people eat less out then in one hand the grocery store and whole sale grocery businesses that are owned by some of the very same people whom have brought to us the financial mess we are in will continue to make more money at our expense and many people will be out of jobs because people like you think that eating out is bad business. Also in a coming collapse of the United States currency etc. What good is for people to have money on retirement accounts when the money will not be there on such circumstances and also when is a fact that our USA dollar is getting ready to be worth 50% less in the next coming months?

    Reply
    • George & Mary-Lynn
      George & Mary-Lynn says:

      Hector – You raise some interesting points. Keep in mind this was written early in this down cycle. People did respond, appropriately we think, by cutting back wherever they could – including eating out less. This was the result of an unsustainable amount of consumption leading up to it. It is – and should be – less costly to buy your dinner at the grocery store than at a restaurant. Of course, your time is worth something as well. If you can afford to pay someone else to do your shopping and cooking, by all means – go out to eat!

      Reply

Trackbacks & Pingbacks

  1. […] Resist the urge to cash out. You may feel stressed about money. We’ll talk about that more in an upcoming show. The Wall Street Journal reported that 40% of workers in their 20s and 30s cashed out their 401(k) when they changed jobs. As we discussed this on a previous Bigg Success Show, this may be a costly decision. […]

  2. […] about money decisions in tough times and how it may affect your 401(k). We started by looking at cashing out a 401(k), which is the absolute last […]

  3. […] we discussed why cashing out a 401(k) is one of the worst things to do in response to these tough […]

  4. I Need Money! Should I Cash Out My Retirement Plan?…

    How you pay by cashing out your 401(k)….

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