The downside of cashing out retirement plan assets

Reasons why you should consolidate your retirement plan accounts


Anytime you change your job, you have the chance to decide whether you will maintain your retirement account or not. You may choose to take out your money, cash it out or even keep your balance in the plan. A report from the Employee Research Institute shows that 4 out of 10 employees with an account balance ranging between $1,000 and $5,000 will cash their money out of their retirement plan accounts.

You may have enough reasons to cash out your money and use it to pay your bills. But you need to think about taking a distribution if it will help you because cashing out from your account will cost you a lot of money in the long run.


You will permanently forfeit the earning power on your money


Suppose you cash out from your plan accounts, that distribution is no longer tax-deferred. Therefore, you will lose the future earning potential of the money along with the distribution. This considerable loss will make a huge difference in your retirement savings amount. You will understand this difference when you consider the future earnings you will get if you save $5,000 in your retirement plan.

For example, let’s say you are 30 years old, and you save $5,000 in your retirement plan. Assuming that the annual return rate is 7 percent and the federal income tax rate is 28 percent, you will have about $38,000 in your retirement plan account when you retire at 65. The amount you will get will vary because the annual rate of return changes over time. This example doesn’t account for product-related fees.


You will not get the total amount


Suppose you withdraw your money as a plan distribution before reaching 59½; you will pay a ten percent early withdrawal penalty to the IRS. You are going to pay ordinary income tax in the year you took the distribution. Taking your money as a plan distribution will make you lose some money as taxes and penalties.


You should do this to maximize your future earning potential


Firstly, you must not be tempted to cash out from your retirement account. Instead of cashing out, you can rollover your fund into your current retirement plan. When you consolidate your retirement plan assets, your account management becomes more straightforward, and your money will keep growing till you retire.

You may not want to consolidate your accounts if you are comfortable with your existing retirement plan. You may not be satisfied with the investment options available with the new plans. Thus, you want to receive your money as distribution.

Suppose you want to maintain your retirement savings growth? You need to consider account consolidation.


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