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Retirement Place > Retirement Planning - IRAs, 401(k)s, Rollovers - What to do with an old 401(k)

Get Help with 401(k) Retirement Plan Options

 

 

Should I Take a Loan Out or Cash in my 401(k) plan? 

 

Consider these options before taking money out of your 401(k)


   

 

Have you been considering the possibility of cashing out your old 401(k) instead of rolling it over? Has the thought of taking a loan out or even cashing in your current 401(k) plan crossed your mind as a potential money problem solver? Perhaps you want to pay off some bills or you want to get a new car or go on vacation in Europe. You may want to think more than twice about this one...  

Statistics show that the majority of young people (and far too many older people) tend to take their retirement plan money and run when they are changing jobs versus saving it and rolling it over. Although some individuals have concerns about cashing in their nest eggs many others think nothing of taking a loan out against their 401(k) retirement plan because they are actually only borrowing from themselves. 

At the same time, most people that are nearing retirement age not only state that they wish that they had started saving earlier but also, in cases involving those who had not held on to their retirement savings accounts or paid off 401(k) loans, state that they wish that they had never touched their retirement funds. These individuals continue to wish that they had allowed their lump sums to grow over time (while it was on their side). In fact, most admit that their reason for cashing in the money was not that important and often they do not even remember what they spent the money on!

 

Prior to making your decision as to whether or not cashing out or taking a loan from your retirement plan is a good idea, for you, please consider the following; 

 

Is it really that important?  

Consider how important taking the money out today actually is to you versus what the difference will be to you as you move closer to retirement. (Yes, believe it or not, you will get older.)                                                              

 

Use this scenario as a yardstick to measure how important taking the money out of your retirement account actually is:  

If you are literally dealing with a life or death situation and this money is the only option between life and death then, without argument, taking the money is your best option at this time. You will need to work very hard to make this up later however you cannot make up for the loss that this money will help you avoid.  No need to feel guilty here.

Any other reason that you are considering for cashing out or borrowing against your 401k should be weighed against this level of seriousness before truly being considered as practical.

  

Surprising Sums:  

When cashing out, most likely you will actually receive significantly less money in your hands than what you expected. For example; If you plan to take $10,000 out of your 401(k), the actual amount that you will receive (in the case of a cash out, not up front on a loan) may be much closer to $6,000 than $10,000 after state and federal taxes, as well as penalties for early withdrawals, are taken out. (See more on taxes and penalties below.)

 

Will you really ever pay it off?  

Regardless of your best intentions... sometimes life happens.  Many individuals take loans against their 401(k) plans for a variety of reasons (most for good intentions like buying a house or even sending a child to college) however; unfortunately, many of these loans are never repaid.
  
 

Taxes and Penalties:  

What is worse than losing the potential growth on your investments because you did not repay your loan? Consider the impact ~ whether you have taken a loan or taken a lump sum:

  • Changing jobs or In the case of a job loss:

In the case of a job loss or change of employer (where you are no longer working for the same company that holds your qualified retirement plan), where the original 401(k) loan has not been repaid (and is not repaid prior to separation of employment), the entire remaining balance of the loan is treated as a disbursement or withdrawal and is fully taxable. 

 

  • Potentially higher taxes:  

The entire amount will be added to your current year's income and could potentially push you into a higher tax bracket causing you to pay even higher taxes for the year.

 

  • Penalties for early withdrawal:

If you are under age 59 1/2 you will be required by the IRS to pay a 10% penalty for early withdrawal of the entire amount as well! 

 

So, what is the big deal?  What is the bottom line?

 

While there are countless other factors to consider, for now, let's focus on the potential growth value of keeping versus liquidating your retirement account nest egg and what the difference could mean to you over time.  

If you borrow from your 401(k) to pay bills, take a vacation, buy a car or any other depreciating asset; over time the value of the original amount that you withdrew will be consumed and you will now have $0.00 for retirement versus the original head start. Had you left the money alone, you would be amazed at what your nest egg could turn into simply by benefitting from the power of time.  How to Roll Over Your 401k.

   
       

Take Advantage of the Compound Effect

Put the power of compounding to work for yourself so that you don't have to work so hard in the long run!

 

Consider this example:

If you have $10,000 in your 401(k) and you decide to cash it out today then you obviously have nothing left.

If you leave it alone and it earns 8% between now and retirement your $10,000 will still grow substantially!

 

View growth via compounding 8% interest over time

(Please click here to view potential returns at 4%, 6% and 8% on a $10,000 401(k) nest egg over time.)

 

 

Think Compounding! If for no other reason, it beats your need to work so hard!

Seriously! You should keep your money invested and let the power of compounding do all of the work for you. After all, you still need money to retire and with the difference that you would have to make up by working ~ just to catch up to the work that the compounding of interest has accomplished for you... Well, let's just say that that would require a lot of overtime!

 

Let the numbers speak for themselves!

The graph above shows a very simple illustration of the value of a lump sum investment of  $10,000 that is invested at 8% over time (this number would likely vary depending on the type of investment that it was in however for ease of illustration we are using a straight 8%).

As noted above, the amount that you withdraw may be significantly less than you originally expected to receive after taxes. In our example, the $10,000 would likely be closer to $6,000 (or less) in your pocket after taxes and penalties (eventually having a value of $0.00). On the other hand, the same amount left inside of your retirement plan and allowed to grow at 8% over time could look like the example below (with no other work or money added to your original $10,000 investment).

 

You get to choose your financial future!

The decisions that you make with your retirement account today can literally impact your financial well being for the rest of your life. What will you choose to do for your future-self? Will your future-self thank you?

 

Will you take the money and run?

 

 

If you take the money out of your 401(k) retirement account:

Cash out = Spend $6,000 (all that is left - if you are lucky - of your $10,000 withdrawal after taxes and fees)

Keep $0.00 (what is left in your retirement account today) and have $0.00 growth on this amount at retirement,

 

 

 

or

 

Will you keep your money invested in a retirement plan? your 401(k) retirement account 

 

 

Keep the original $10,000 inside of a 401(k) retirement plan or Rollover IRA (at 8% with no other funds being added or subtracted) and enjoy your retirement in:


10 Years =   $21,589

20 Years =   $46,610

30 Years = $100,627

40 Years = $217,245

45 Years = $319,204

 

 

 

So if you are 22 and will retire at age 67, which obviously doesn't even seem like something that will ever happen to you at this stage of your life (but it will), if you have saved $10,000 (yes it is possible) and are thinking about cashing it out today, just think how hard you will have to work to earn an extra $319,204 in your lifetime to make up this same amount (when you could be saving more). Especially if do not get serious about saving until it occurs to you that you will actually have to do so!   

If this doesn't seem like a big deal to you now - ask anyone, anywhere, that is over age 50 ~ or even in their forties ~ what they would do if they were in your position (or what they actually did/wish they had done if they had the opportunity). Outside of extraordinary circumstances, they will probably say that they would or wished that they would have chosen to leave the money alone and let it ride given the opportunity.


Cashing out of your 401(k) plan is perhaps the most ineffective (and tempting) option
when you leave your old job or move on to a new employer! 

 
Why not make the rest of your life easy by making smart decisions with your money today? 
Call us today at 1-800-50-PLACE (1-800-507-5223 or 1-919-719-7200) for more information! 

 

 

 

Smart Money Move:

 

Rollover your old 401(k) to a Place Trade IRA today!

Rather than suffer through all of the disadvantages above and risk a lower standard of living than you had planned for your golden years, make the smart choice and take control of your financial future! 

 

 

 

Call us today at 919-719-7200 or 800-50-PLACE for more information!


Should I cash out my 401(k) retirement account or roll it over?

Related Articles

 

 

For more information on cashing in or taking your money out of your 401(k) or another retirement savings plan please review the official IRS website and visit: Cashing in your 401(k) instead of rolling it over?

(Please be sure to check with your tax and/or legal advisor prior to making any contributions, withdrawals or other changes to your retirement account. Place Trade Financial, Inc. does not offer tax or legal advice and nothing contained herein should not be considered as tax or legal advice under any circumstances.)

 

r Your 401k. 401k roll over Rollover your old 401(k) to a Place Trade Self-Directed IRA or Speak with one of our Experienced Financial Consultants to get Advice on your options or help develop a new financial plan.


Retirement plan specialists are available to help you assess your options and determine which retirement planning strategy best fits your needs.

Changing Jobs? What to Do With an Old 401(k) 

   

Call us today at 919-719-7200 or 800-50-PLACE for more information!

   

Changing Jobs? What to Do With an Old 401(k) 

 

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Make smart decisions with your old retirement plans today so that you can maximize your potential and get the most of your financial future!

 

Rollover your old 401(k) to a Place Trade Self-Directed IRA or Speak with one of our Experienced Financial Consultants to get Advice on your options or help develop a new financial plan.


Please be sure to check with your tax and/or legal advisor prior to making any contributions, withdrawals or other changes to your retirement account. Place Trade Financial, Inc. does not offer tax or legal advice. Information provided by Place Trade is for educational purposes and should not be considered as tax or legal advice under any circumstances.

 

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