YOU ASK:

Should I cash out my 401k?

WE ANSWER:

Cashing out your 401k prematurely is hardly the best thing you can do, especially if you are under age 59.5. The ordinary income tax and the 10 percent early withdrawal penalty might be a heavier blow to you than you have imagined, since at the end of the tax year, you will have to pay a quarter of the amount you have received back to Uncle Sam!

The best thing to do with a 401k is think long term. A 401k cash-out is not advisable, even if the market is down, since you never know what the future holds. The longer you wait, the better. Cashing out your 401k plan will deprive you of a very significant source of retirement income that you might need for years on end. Even if you are just about to retire, you might still live, say, for another 30 years.

A Saved Penny Makes Them Many

According to a recent survey, some 40 percent of employees have opted for cashing out their 401k plans, rather than sticking to them till retirement. The most common reason why they do that, according to the survey, is because they find the accumulated money not enough. Young people changing jobs are the ones who are most susceptible to cashing out their 401ks to buy nicer cars, or invest in a business, forgetting they might need this money when they retire.

However, pension plan participants should note that what seems little today can grow into a significant sum of money in the long run. If, for example, a 30-year-old person establishes a 401k retirement plan and contributes $2,000 a year, in 30 years' time the accumulated amount will come up to a minimum of $60,000, not including the investment returns and possible matching employer contributions.

Alternatives to a 401k Cash-Out

Indeed, the best thing you can do is resist the temptation of taking money out of your 401k. Alternatively, you take a 401k loan if you have an immediate need for cash, or do a 401k roll over to a Roth IRA.

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