ONE OF THE WORSE MISTAKES YOU CAN MAKE WITH YOUR 401 – (K) WHEN CHANGING JOBS
Several years ago, a good friend confided she cashed out her 401K and spent the money. At the time I thought an unwise decision. But of course being less diplomatic (hard to believe right) I said something more in the line of: YOU DID #$@% WHAT ?
I was reminded of this story last week, when I heard the founder of BET, (FYI – He sold that business for $1 Billion!) state: Almost 60% of African Americans cash in their 401K when charging jobs.” You can see his interview by clicking the below link.https://www.cnbc.com/amp/2019/09/12/robert-johnson-gives-trump-credit-for-doing-positive-things.html
A former U. S. President use to OFTEN SAY: “LET ME BE CLEAR”
UNLESS SOMEONE YOU LOVE IS SERIOUSLY ILL OR GONG TO PRISON – YOU NEVER, EVER THING ABOUT CASHING IN YOUR 401K PLAN WHEN CHANGING #$@% JOBS!! NEVER!
THE HARM IN CASHING OUT
Let’s assume you accumulated $20,000 in your 401K plan (congratulations) and you decide to take it and spend it.
WHY THIS IS A VERY BAD IDEA!
ZERO taxes have been paid on your deposits or appreciation. Uncle Sam and other Aunts are going to tax that $20,000. Uncle Sam being kindly, whispers in your ear, it’s YOUR money take it, SPEND IT ALL! Buy that car. It’s gorgeous – it’s you! However, our sweet Uncle neglected to mention a few critical tax implications, as well as penalties.
If you are not yet age 59½ or older, you owe a 10% early withdrawal penalty.
Then you pay your federal, state, county, city and BREATHING (I think I saw this on the debate last week) taxes.
If Uncle Sam decides you made too much extra money, he may kick you in a higher tax bracket
You may be hit with another penalty for under paying your taxes in a timely manner.
Your $20,000 lump sum check may actually drop to a little over $10,000 that you get to keep.
However, the major cost, is the lost power of compounding on that $20,000. If you had simply left your money in a tax deferred retirement account, after 30 years, assuming about eight percent interest/appreciation, you would have accumulated about $220,000. WOW!
Thirty years later I’m guessing you will not remember what you spent that $20,000 (which should have been $10,000) on. But you probably will remember your struggles to pay an unexpected $10,000 in taxes and penalties!
Good Old Uncle Sam is in charge of the largest nuclear powered, money vacuum cleaners in the world. And, has federal agents armed with assault weapons ready to break in your door and take HIS money when you refuse to pay up.
LETS LOOK AT OPTIONS THAT KEEP UNCLE SAM’S ARMED FEDERAL AGENTS OUT OF YOUR BEDROOM AT 3 AM!
1. LEAVE THE MONEY IN YOUR OLD 401-K UNTIL YOU HAVE A PLAN
In most cases, you can keep the money in your former employer’s plan. You may like their investment options or the plan has low fees. ZERO tax/penalties if you leave your money in the existing plan!
2. ROLLOVER OR TRANSFER THE MONEY TO YOUR NEW COMPANY’S PLAN.
Majority of new employers allow/encourage you to transfer your money directly into your new 401-K plan. Again, ZERO tax/penalties for a rollover!
Ask your employer/Manager how it is done. However, investigate investment options and fees and compare before making a transfer.
3. ROLLOVER OR TRANSFER THE MONEY INTO A TRADITIONAL OR ROTH INDIVIDUAL RETIREMENT ACCOUNT (IRA)
You can move the money into an IRA and choose your own investments. As you move from job to job, a rollover IRA is a good option, allowing you to accumulate your retirement savings in one location. This can make the management and decision making easier. Another option that avoids penalties and fees.
Just remember your former employer’s 401(k) plan may offer access to better investment options, tools, and pricing that you may not get with an IRA. Do your research before making this transfer.
If you are just starting your career, you may work for 12 or more employers. You will have to decide what to do with your 401K money numerous times during the course of your career. As your accounts and net worth grows I recommend talking with a financial advisor.
I had to make similar decisions several times during the course of my career. I eventually rolled all my 401 dollars into ROTH and Traditional IRAs.
CASHING OUT! – OF THE WORSE MISTAKES YOU CAN MAKE WITH YOUR 401 – (K) WHEN CHANGING JOBS
REMEMBER – UNLIKE YOUR PARENTS, YOUR FUTURE WELL BEING IS MORE DEPENDENT ON YOUR RETIREMENT SAVINGS!
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong men and women in both my family and professional life. It is time to serve and give back.
I started my first business at ~13 years of age. I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your personal situation. For individual finance advice please seek your own licensed CPA or financial advisors.