Last December, when I left my previous employer to start my own business, I had an important decision to make on what to do with my existing 401k. Luckily, being a financial planner, I knew exactly what I was going to do, but many others that are not in the profession or really don’t have a good grip on their financial situation might not be as fortunate. When changing jobs, the decision that you make to do with your 401k could be a costly one if the wrong decision is made. It’s important to know the different options that you have on what to do with your 401k whenever you leave your current job.
Cash Out 401k
The only reason that I have this option here is because you would be surprised the amount of people I talk to that elect this option. The most common reasoning I here, especially for 401k plans that have matching, is that it’s “The company’s money” not “theirs“. Wow! Isn’t that great reasoning?
By taking “The company’s money”, now that person is stuck with a 10% early withdrawal penalty plus ordinary income tax. Typically, when you cash directly from your 401k they will hold 20% standard plus the 10% early withdrawal penalty. Obviously, this was not the direction I was going to go. [Read more…]