Be Careful About Cashing Out Since the recession, Americans have been keeping their jobs longer. In 2024, the average tenure for U.S. workers was 4.6 years, up from 3.7 years in 2024. 1 Even so, theres a good chance you may move on to a new job in the not-too-distant future, and when you do you could face a decision about how to handle any funds you have accumulated in your employer-sponsored retirement plan. Typically, you have four choices, depending on the situation:
Preserving Tax-Deferred Savings
Consider, however, that if you receive a check payable to you from your former employers plan, 20% will be withheld for federal income taxes. You have 60 days from the date of the check to roll over the entire distribution including the tax withheld to an IRA or a new employer-sponsored plan; otherwise, amounts not rolled over will be considered a taxable distribution. The fourth choice a cash distribution can be problematic. Although a quick infusion of cash may be appealing, it would be wise to proceed with caution before using a distribution for nontax-advantaged purposes. Such a disbursement would be taxable as income, could be subject to a 10% early-withdrawal penalty, and might push you into a higher tax bracket. Moreover, by depleting your retirement account early, you might come up short when its time to retire. Fortunately, cashing out has become less common, perhaps due to a greater understanding of the potential consequences (see chart). Younger people are more likely than older workers to take the money and run. 2 This is a disturbing trend, because younger people may have the most to gain by keeping their tax-deferred savings working for them over the long term. To use one hypothetical example, a 30-year-old who cashes out $16,000 could lose nearly $500 in monthly retirement income if he or she retired at age 67 and lived to age 93. 3
Withdrawal Rules
Separation from employment can be a stressful event, but it might offer you an opportunity to take control of any assets in your former employers plan. Be sure you understand the options so you can make an appropriate decision for your situation.
1) MarketWatch, January 12, 2024
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