Why Converting your 401k to Cash is not Advisable
Taking a cash distribution is very tempting when it’s time to rollover your 401k investments into a new account. The truth is, and here comes the painful reality, lest you are at the age of 59 1/2 or extremely need money now you would be up in arms to cash out. I understand that it is the most enticing choice but is also the most expensive. Here’s why.
It is considered a cash distribution if you decide to leave your present employer and request to receive the whole of your 401k savings or a portion of it. Perhaps you believe that you should have it all since it is your money and do what you want. In reality it is yes, but the taxman is going to demand payment from you at a great cost. Basically, you will have to pay 2o% withholding tax and may also be fined 10% as premature distribution if you were to take cash in hand under the age of 59 1/2. I guess you’re surprised why I talked about that before.
A lump sum payment is quite a bit of money, as you can see compared to a rollover option where your money is left to grow continually. Having cold hard cash in your hands is the only true benefit of cashing out 401k. If you are in desperate need of cash this is the best choice. Desperate means, you have bills that must get paid like medical bills, or facing the detriments of home loss. Desperate need does not mean buying a motorcycle or a new shoe collection. This is a choice that should not be thought of well. It may look impressive to have all this cash in your hand, but how will you restore your retirement? If you are in your 50′s and close to retirement, you may have to think more than twice and think if this is the correct option.
Here are some things to remember:
*Lump sum payment should only be the option if you are in dire need of cash
*The taxman will require you to pay exorbitant fees
*If you choose to cash out, think about what you can do to rebuild your retirement
*Cashing out should only be done if you have no other 401k rollover options that can help you.
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