Almost 70% of 401(k) participants who
change jobs take their assets as a cash distribution. The
smaller the size of the account, the more likely it is that
the owner of the account will spend the money.
As tempting as it may be to view your
401(k) assets as a welcome infusion of cash to pay off credit
card debt, a car loan, or help pay for an upcoming vacation,
it's important to keep in mind that it's almost never in
your best interest. As much as 50% or more of your account
balance could be eroded by taxes and penalties. Even worse,
you'll permanently lose the
tax-deferred
status of those assets.
For instance, if just once in 30 years you
took $10,000 out of your 401(k) instead of rolling it over
into an IRA earning 8% annually, your retirement nest egg
could end up more than $100,000 short.
Instead,
it's a good idea to take advantage of the portability of your 401(k) to
evaluate your options and choose the one that best helps you meet your
goals — whether that means leaving the money where it is for the
meantime so you can concentrate on other things, taking it with you to
your new job, or choosing an
IRA
that's suited to your investment style. In the long run,
you'll probably be glad you did.
