Why didn’t I cash out my 401(k) – which at $10,000 is a fairly substantial sum for me – when I changed jobs? Because I would be flamed out of the pf blogosphere, that’s why. 
Okay, the real reason is that cashing out my 401(k) is one of the worst moves I can make for my long-term financial health. Obviously each person’s circumstances are different, but most personal finance experts agree that things should be pretty dire for someone to consider cashing out.
Looking at the 2 scenarios below, I’m really fortunate to not be in a dire situation where I have to cash out my 401(k)…
| Scenario 1: $$$ cashed out
|
|
| Marginal tax rate after making the withdrawal: | 25% |
| The amount withdrawn from tax-deferred account: | $ 10,000 |
| The estimated taxes due on the amount withdrawn are: | $ 2,500 |
| The 10% penalty on the amount withdrawn will be: | $ 1,000 |
| Total taxes and penalties are estimated to be: | $ 3,500 |
| After taxes and penalties the amount remaining will be: | $ 6,500 |
| Scenario 2: $$$ stayed put
|
|
| Current tax-advantaged savings: | $10,000 |
| Years of growth: | 35 |
| Average annual gain: | 8.0% |
| Average annual inflation rate: | 3.0% |
| Current savings will grow to: | $147,853 |
| Inflation-adjusted: | $ 50,914 |
***By cashing out my 401(k), I would get back LESS THAN 65% (don’t forget state taxes) of what I originally had in the account. In addition, I would’ve missed out on compounding interest, by which my $10,000 could grow into $50,000, in today’s dollars, at retirement.
Cashing out sounds like what it is: a lousy deal.
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Calculators*
Early Distribution & Saving Growth.
*Please note that I do not endorse the websites’ services and/or accuracy. Please consult a professional before you make any financial decisions.
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Were you seriously considering cashing out your 401(k)? or just curious about the possible outcomes?
I recently read an article that a large number of workers in their 20s cash out their 401ks when they switch jobs. Great post!
I have a friend who has a bunch of money in a 401k and is debating pulling it out. Wait ’till I show him this calculator.
You did miss taxes on the second scenario. You will have to pay taxes on that $50,914 when you withdraw it in 35 years. That will reduce it to about $38,200 (assuming you’ve still got a 25% marginal tax rate).
This doesn’t change your conclusion, of course.