3 Reasons You Shouldn’t Cash Out Your 401K When Switching Jobs

If you are getting ready to switch jobs and are wondering what you should do with your existing 401k, the number one thing you should know is that cashing it out is probably not the best solution. While you have the option to cash it out, here are three reasons you should consider looking into a different option for this money.

The money was designed for your retirement

A 401k is a savings plan designed specifically for retirement. These plans allow individuals to save a little bit of money each week for the future, and this allows people to have the necessary funds for retirement. If you cash out your 401k plan, what money will you have when you retire? This is a good question to think about before you decide to take the cash from your retirement account.

You will pay fees

Cashing it out is an option, but it is not an option that is free. If you are under the age of 50 1/2, you will be subject to fees if you take the cash from this account. The fees typically equal 10% of the balance in the account. This means that if you have $30,000 in the account, you will owe a fee of $3,000 just for cashing out early. This penalty fee is not the only thing you will owe though.

In addition, you will have to pay around 20% federal income tax on this money, and you will have to pay state taxes on it too. In all, you may end up having to pay thousands of dollars that you would not have had to pay if you had waited.

You are not obligated to cash out

Finally, you should realize that you are not obligated in any way to cash this account out when you switch jobs. Because of the way 401ks work and are designed, your employer can never make you cash out. In most cases, employers will allow employees to leave the money in their accounts even if they switch jobs; however, there are other options if this is not a choice.

Another option is to transfer the money into the 401k your new employer offers. A third option is to transfer the money into an IRA. All of these options will allow you to keep the full balance in your account. In other words, there are typically no fees for these options.

If you are not sure what you should do with your 401k account when you switch jobs, you may want to schedule an appointment with a financial advisor like those at Wealth Builder Advisor. He or she may be able to help you make the best decision for your situation.