When most people leave a job they get that itch to just take their 401k in cash and go get crazy at the Mall. Bad idea! If you take your 401(k) as cash your employer is required to withhold 20% of your pre-tax contributions and earnings (your actual tax rate may be higher). In addition to that you will also be dinged with a 10% penalty tax if you are under the age of 59 1/2.
Say you have $10,000 in your old employers 401k plan and you decide to take the cash (oh yeah, new flat screen TV, that Movado watch I always wanted and drinks on me tonight fellas!). But after taxes are withheld and you get hit with the 10% penalty that $10k is suddenly only around $7,000. Worse yet, you just took one step closer to flipping burgers at McDonalds when you are 65 years old because you didn’t save enough for retirement!
Don’t take the cash. Instead roll it over into an IRA and you will have no taxes on it (yet) and no early withdrawal penalty. And your contributions and earnings will continue to grow tax free. Bye Bye McDoanlds, Hello beach front condo!
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