Don’t Cash Out Your Old Retirement Accounts as published in InsideNova.com
Does your company retirement plan rock or not? Either way, I believe you’ve got far more control over your financial security in retirement than you may think. Your best bet is to avoid the most common self-inflicted wounds I see people making with their retirement savings. One of the worst ones is also among the most tempting, especially for younger investors: Don’t cash out of a former employer’s retirement plan. Instead, roll the assets into an IRA or new employer retirement plan – or leave it where it’s at if that’s possible and desirable.
To illustrate, let’s say you’re 25 years old. You’ve just changed jobs, leaving $2,400 in your former employer’s retirement plan. With decades of saving opportunities ahead, you decide to pocket the money and start fresh at your new gig. It’s not enough money to matter in the long run (you reason), and you’d sure love to spend it right now.
Please think twice before opting for the “easy come, easy go” approach. First and foremost, if you cash out instead of keeping your assets in a retirement account, they’ll no longer be there to grow tax-deferred toward your eventual retirement.
Now, $2,400 may not seem like much to retire on. But there are oodles of studies demonstrating that modest investments made when you’re younger pack far more power than those made later on – especially when they can grow and compound tax-deferred as they can in a retirement account. Bottom line, small investments early on can add up in big ways over time.
On top of that, if you do decide to take the money and run, you’ll pay a pretty price for the privilege. When you take early withdrawals from a retirement account, you’ll typically pay ordinary income taxes on the full amount, plus a 10% penalty. So, for example, you’re $2,400 savings can be slashed to $1,600, or less, after the tax axe falls.
Is it really worth giving up, say, $25,000 of eventual retirement assets to have $1,600 to spend today? Choose wisely.