March 1, 2003
Cashing In A 401(K)?
Q: How do I go about cashing in my investments since I’ve been terminated from my job for a year, and I’m no longer contributing to the 401(k) plan?
—F. Crisp, Via the Internet
A: If you’ve lost your job and still have investments in your former employer’s 401(k) plan (or other retirement plan), don’t be so fast to take a cash distribution. Remember, those funds may represent most of what you’ll have to retire on, and taking a cash distribution before you reach age 591/2 means you open yourself up to major tax liabilities that will deplete the very money you want to use.
If you don’t really have to use your retirement account, don’t. When you cash out your 401(k) before age 591/2, you must pay federal income tax at your current tax rate, plus a 10% penalty—and your state may also require you to pay state taxes, as well. We encourage you to avoid cashing out because it can slice your retirement sum by as much as half. For example, if a person in the 31% tax bracket took the cash distribution of his $15,000 retirement account, he would walk away with $8,850 after taxes and the 10% penalty; leaving the money alone, at an 8% annual return over 30 years would yield more than $150,000.
Retirement plans held at a former employer can be rolled over into an IRA account without penalty, thus safeguarding a major source of your retirement income. If an absolute emergency makes it necessary to cash out of your retirement account, simply contact the human resources department of your former employer—which will have the proper paperwork for you to fill out—and in a month or less, you should be able to receive a check.
Mail your money management questions to Ask B.E., BLACK ENTERPRISE, 130 Fifth Ave., New York, NY 10011, or send an e-mail to email@example.com.