When changing employers, is it worth it to cash out a 401k early?

When changing employers, is it worth it to cash out a 401k early?

This week on the Pete the Planner show,
we answer your money questions because what else are we going to do I have no
other measurable skills or talents as the green shirt edition of the show if
you’re watching it PetethePlanner.tv and if you aren’t do and you’ll see the
green shirt you’ll think what a waste of time on this week’s show we’re answering
different money questions we’ve got let’s see what we’ve got this week we’ve got a
woman who’s changing jobs she wants to know what to do with something something
we’ve got another guy who’s trying to pay for his two daughters in college and
then we got some other stuff oh the other one is my own personal financial
question I’m gonna ask myself so that seems mentally healthy and then the
biggest waste of money of the week before we get started boy do I have good
news for you podcast listeners those that listen to our podcast every week
some of you hear this show on the radio others of you hear the show on the
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we like to experiment with different formats from time to time but the most
popular format of our podcast is coming back next month the million dollar plan
is coming back next month we listen we listen Frank how are you welcome to the
show hey thank you good how are you I’m excellent you ready for our first
question of the day I am ready for the first from a woman named candy hi candy
yeah it’s like fill-in you know we shouldn’t joke about people’s names yeah
this is coming from a guy named Peter so I know how hurtful this can be right yes
okay hi I’m leaving one state to work in
another I have eleven and a half years of service a pension plan I will defer
until retirement and a deferred comp balance of twenty three thousand
American dollars thirty days after the termination of my job I have the option
to leave it and let it grow very slowly or cash it out my initial thought my
initial thought was to leave it however an attempts to pay off all my debt for
the last year I have a school loan of eighteen thousand dollars if I cash out
my deferred comp penalty free and pay the federal taxes quoted at 20 percent I
just about break-even to pay my loan off in full my new job offers a pension plan
and deferred comp and I have 30 years of work before I can retire when it makes
sense to cash my deferred comp and snowball that monthly payment into other
investments that are more profitable investments and in my control to manage
I also thought of using that monthly income budgeted for the loan towards our
mortgage and pay off our home in six years time so we can cashflow college my
firstborn graduates college in nine years any help would be awesome thank
you candy all right I don’t even know where to start do you think she calls
her house Candyland I hope so I would I would absolutely that was a
great game or is a great game it’s not bad you know I play with my kids now and
there’s like you know it’s you remember it differently than when you play it now
I believe that yeah it’s it was better than um okay so I definitely know where
to start here and and let’s let’s hit with some classic things generally when
you leave a job the worst conceivable thing for you to do is to cash out a
retirement plan and to use it to do things okay so now here are the
different things people typically do when they cash out a retirement plan
prior to age 50 and a half because it’s not really considered cashing it out if
you do it after 59 and a half it’s just a distribution or a withdrawal from your
account but if you do a prior to 59 half what she clearly is unless she wants to
work to age eighty nine and a half then then this would be generally a bad idea
and this is what people do when they cash out a retirement account they do
all sort of stuff pay off debt they go on vacation they give themselves a
little blue cushion sometimes when people leave a job and they don’t have
another job they’ll cash out their retirement account and use that as like
an extra severance or something to you know
tide them over until their next job now here’s the issue with this it is your
money you can do whatever you want with your money and sometimes you’re put in a
jam that’s not preferable but you’ve got to use the resources you have to
get out of that gym generally speaking here is why
taking out a twenty three thousand dollars cashing it out here’s why it’s
typically a bad job a bad idea is because you would typically lose about
30% of that 23,000 which my math tells me that’s roughly what 6,000 it’s
something yes 6900 so that would take it down to like
sixteen thousand dollars in change she says in this particular situation she
wouldn’t have to pay the ten percent penalty she wouldn’t have to you know
she would have it the access to it penalty free and she would have to pay
the federal taxes which is that twenty percent so the thirty percent I speak of
is the twenty percent in federal taxes the ten percent penalty and she is
suggesting she does not have the penalty I’m sure there’s a rule for that I’m
sure that at some point in time when I and I had a securities license I used to
know that rule I I no longer remember the rule but I will take her word for
that she doesn’t have the penalty so that is to suggest that she would lose
forty six hundred dollars in federal taxes and then she would have roughly
the eighteen thousand she would need to pay off her loan okay on the surface I
would say no way don’t do it yeah and I kind of still
feel that way however Nicole it seems like Candy’s got a plan right whenever
someone starts out and they give us a lot of detail they’ve always got
something kind of already in the works yeah and I and so her plan is not
actually too bad so what she would do is of course eliminate the student loan of
eighteen thousand dollars here are my here’s my biggest concern
yeah I doubt and maybe I’m wrong because it looks like she’s got a pretty good
start on her mortgage yeah I doubt that she’s paying a lot on her student loan
right now but she might be but I doubt she is yeah so by eliminating that
student loan from a cash flow perspective she doesn’t really impact
her situation that much because there’s not already being a lot being
contributed to that so yeah so right like if she eliminates a payment that’s
three hundred bucks a month then by getting rid of twenty three thousand
dollars in assets she frees up three hundred dollars a month in capital which
can go to do something else and she used the
term snowball as a verb of then we could take that 300 a month and then build an
asset back up right there’s some momentum that comes from it yeah and
look I that’s a reasonable thing the biggest concern other than that is
sometimes when people say well I could take this and eliminate that and then I
when that’s done I could take this and do that
it’s something along the way disconnects and people don’t do what they say
they’re gonna do and then the whole thing ends up being a bad idea like the
worst case scenario past the first step is that she eliminates the student loan
debt and then reabsorbs that whatever her payment is the student back into her
lifestyle increases her lifestyle decreased her assets and that doesn’t
make a lot of sense to me no not so much so I’m I’m I’m okay with this I can’t
believe this I feel like I should lose my financial radio show host card after
ten years of giving her the you know permission to do what she said I would
double check with a tax advisor tax expert on the penalty free thing again
I’m probably supposed to know this if I’ve got financial people listening to
the show feel free to email [email protected] and said you
should know this you dummy you know what I forget a lot of stuff
sometimes you have to have someone check your work you know yeah yes like we’re
showing our work so let’s just gotta double check it for us and I’ll admit
when I don’t know okay so that’s what I do yeah I would go with it for this
person candy I would do the plan that you just said but you have to do the
follow three which is to take whatever per month you freed up in student loan
payments and do something amazing with it including saving the money back up or
paying down the mortgage you are right you are now gonna have two pensions
you’ve got a 30-year career ahead of you you’ve got a good head on your shoulders
and your firstborn graduates college of nine years so yes go ahead
according to Nicole after the break here’s what we’re gonna do okay we’re
gonna fast-forward to as if this candy person had two daughters in college and
that is our next email or they want to know how should they fund the gap and
their college plan 401k loan. Their all Roth IRAs or
traditional I raise we’re gonna hit that next now as always if you have a
question you want to have it read and answered by yours truly [email protected] [email protected] because it’s with a K I wouldn’t do it
that hard if it was a C so this is the Pete the Planner show we answer your money
questions and we’ll be right back after these words.


2 thoughts on “When changing employers, is it worth it to cash out a 401k early?”

  • When you take money out of a 401k, even after retirement, isn't that money taxed? It's going to be taxed regardless so lumping the tax in with the "Penalty" and calling it 30% seems a little misleading as you will pay tax on it now or at 65. Am I missing something here? It always struck me as odd people said this.

  • I hate it when this happens…

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