Marino on Money: June 3
This weeks question is about a 401(k) from a previous employer. A viewer asks what they should do with it. Yesterday we reviewed rolling it over to another retirement account. Today I’ll talk about cashing it in. Is that a good idea? That depends on what it’s worth to you. There is a cost, and it’s expensive. If you are under age 59 1/2, there is a 10% penalty, plus federal income tax and state income tax. That could be 32%, or over 50% depending on your tax bracket.
32% is more expensive than any loan I’m aware of. If you really need money, do you want to pay 32% in interest? If I needed money that bad, I would exhaust every other option before I cashed in my 401(k). I’d check with my bank or credit card company and see if I can borrow from them. I doubt it would cost 32%.
Taxes and penalties are expensive, but that may not be the worst part. Before you cash it in, think about how long it took you to save that money. Was it a few years? If you cash in the account now, how long will it take to save that much money again? Take your age today, and add that number of years to your current age. How much closer does that bring you to the age you want to retire? None of us are getting any younger. And the longer we wait to save money, the harder it is. Try not to cash in your 401(k), unless you have no other options. It is expensive today, and even more expensive tomorrow.
There is one final consideration, and that relates to loans against your 401(k). I will review that tomorrow.
If you have a financial question for Ross, you can use the Marino on Money page.
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