Denver is no different from any other area in the country when it comes to cashing out a 401(k). This tax-deferred, employer-sponsored benefit involves having your employer withdraw a predetermined amount of pre-taxed money from your paycheck, and have this money placed in a retirement investment account for your future retirement.
This being the case, why would anyone choose to withdraw this sacred money, designated for their own retirement? In this case, Peter is not robbing Paul, but Peter is robbing Peter.
As an accountant in the Denver area, typically, the reasons why this type of withdrawal takes place is because the employee:
- Is facing some type of hardship
- Has left the company and chooses to cash out their 401(k) rather than roll this over into a new retirement program (half of all employees do this)
- Has decided it’s time for a much-needed vacation
- Has chosen to do a home remodel
- Has a child getting married
The reasons are endless for why employees choose to cash out their 401(k). But, when it comes to cashing out your 401(k), what looks like roses might turn out to be thorns.
Following are the damaging effects from cashing out your 401(k):
- Instead of your savings growing, your savings is now penalized – typically, if your 401(k) is cashed out before you turn 591/2, your cash will be taxed and incur a 10% penalty, not counting the 20% the federal government will take, meaning for every $1000 you cash out, you will receive about $800.
- Your money is virtually gone – once you withdraw from this savings account, the money is no longer there. Studies have shown that those who take out money from their 401(k) are less likely to replace this money, which means you have just robbed yourself of your own future
- You lose more money than you withdraw – because of the compounding effect of a 401(k)—where the interest collected builds on itself and creates more money, this whole financially advantageous process for your future is lost
- Your paycheck will be less – if your cash out involves a loan against your 401(k), you will now have to pay a certain amount on this loan, in addition to the amount you already owe on your original 410(k) plan
- Money in a 401(k) is protected – should you face a financial hardship that might involve a future bankruptcy, a 401(k) is protected against creditors and bankruptcy.
Just like every other area in the country, in Denver, most people consider their 401(k) to be “their own money that they can do what they want with.” However, as an accountant that sees the big picture, what isn’t understood is that this money should never be a part of your current situation. It is intended to be part of your future life, to sustain you, at a time when income might be harder to come by and yet expenses will keep rolling in.