Approximately half of all people cash out their retirement plan when they switch jobs.

You: Well, I wasn’t going to leave my retirement plan at my old company either.  My boss was a real jerk.

I don’t know your boss, but –

You: He was a jerk. I jut told you that. Pay attention.

We’ve all had bosses who–

You: Not like this guy!

Still, you can’t let emotions take over your financial decision-making.  Whether it be due to hatred of your former employer, a desire to experience some retail therapy post job loss, or just an intense desire to cut the ties as quickly as possible, an outright distribution of your retirement plan is never a smart idea.

You: So how can I take my money without distributing it?

Simple: roll it over. Take it with you to either your new employer’s retirement plan, if the new boss allows it, or roll it over into your IRA. Either way, you’ve ended the financial relationship but preserved your retirement plan.

You: Why is a distribution so bad?

Because you don’t get all the money in your plan.

You: My boss takes some if I distribute it?  UGH! I hate that guy!

No, but the government does.  A lot of it.  First the feds with withhold 28% of your distribution.  Then, you’ll be subject to a 10% early withdrawal penalty if you’re not at least 59 1/2 or meet some very other strict criteria.  Most states will take their share too.  It’s a mess.

This is one time when you don’t want to be like the other kids. According to the report cited in Half of workers changing jobs cash out 401k, 60% of those in their twenties cash out, by far the highest cash-out rate of any age group.

See it differently?

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