Yusra3
VIP Contributor
When changing jobs, some employees face the question of what to do with their 401(k) account. Rolling it over to the new employer is often the best approach. But an employer match on contributions may tempt workers to take the cash instead.
How 401(k) Matches Work
Many companies that offer 401(k) plans also provide matching contributions up to a certain percentage. For example, an employer may match 100% of contributions up to 3% of salary.
So if you earn $50,000 annually and contribute 3% of your salary to the 401(k), or $1,500, the employer would deposit a $1,500 match into your account.
This doubles your retirement savings and provides a significant boost. But you only get the match if you remain employed at the company.
The Temptation of Cashing Out
When you leave a job, you could cash out the 401(k) account instead of rolling it over. This provides quick access to the funds.
But you'd miss out on the employer match you earned. You'd also face penalties if cashing out before age 59 1⁄2. Income taxes would be due on the distribution. And you'd lose years of potential tax-deferred growth.
For example, if you had $50,000 in your 401(k) and cashed it out at age 30, you might net $30,000 after penalties and taxes. Investing that $30,000 and earning a 7% annual return could grow it to over $200,000 by age 65.
Whereas keeping the original $50,000 invested over 35 years could make it worth over $500,000, even without additional contributions.
The employer match makes cashing out even more detrimental. You forfeit "free money" that supercharges your savings.
Think Long Term
While tempting, cashing out a 401(k) results in huge lost opportunity cost. Keep the account growing in a tax-advantaged way throughout your career. Resist short-term thinking and focus on your long-term retirement goals.
How 401(k) Matches Work
Many companies that offer 401(k) plans also provide matching contributions up to a certain percentage. For example, an employer may match 100% of contributions up to 3% of salary.
So if you earn $50,000 annually and contribute 3% of your salary to the 401(k), or $1,500, the employer would deposit a $1,500 match into your account.
This doubles your retirement savings and provides a significant boost. But you only get the match if you remain employed at the company.
The Temptation of Cashing Out
When you leave a job, you could cash out the 401(k) account instead of rolling it over. This provides quick access to the funds.
But you'd miss out on the employer match you earned. You'd also face penalties if cashing out before age 59 1⁄2. Income taxes would be due on the distribution. And you'd lose years of potential tax-deferred growth.
For example, if you had $50,000 in your 401(k) and cashed it out at age 30, you might net $30,000 after penalties and taxes. Investing that $30,000 and earning a 7% annual return could grow it to over $200,000 by age 65.
Whereas keeping the original $50,000 invested over 35 years could make it worth over $500,000, even without additional contributions.
The employer match makes cashing out even more detrimental. You forfeit "free money" that supercharges your savings.
Think Long Term
While tempting, cashing out a 401(k) results in huge lost opportunity cost. Keep the account growing in a tax-advantaged way throughout your career. Resist short-term thinking and focus on your long-term retirement goals.
