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Cashing Out Your 401K Should Be Last Resort

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Oct 22, 2008 1:06 pm US/Eastern

Cashing Out Your 401K Should Be Last Resort

Learn More: WBZ's Economic Resource Guide
Learn More:Expert Answers Your Personal Finance Questions

Reporting
Paula Ebben
BOSTON (WBZ) ― We all know that we need to save for retirement, but that can be tough in today's economy. Financial experts advise their clients not to tap into those funds unless it is a real emergency.

Debbie Kraft recently lost her job. Right now she is able to get by on her savings, but worries that she might have to dip into her 401k to pay her day to day bills.

"I have three months at least for the mortgage, car payment, insurance, regular bills, but if that runs out, and I don't get full-time employment, then that's something I have may have to utilize."

Debbie has changed jobs before, and has always rolled her retirement savings over. But experts say many workers are not following that example. A recent online survey found 40% of younger workers cashing out their 401k plans when they leave a job.

"You're paying a tremendous price," according to David Wray, president of the Profit Sharing/401k Council. He says cashing out is bad for two reasons. First, federal and state taxes can take up to 40% of your proceeds. Plus, you lose the benefit of compounding, where even small amounts of savings can grow over time.

Bottom line: experts say that you need to think about your retirement savings differently than your regular savings.

"You may think, 'I'm taking $5,000 out of that plan', but you're really taking $20,000 out of your retirement fund when you retire," Wray said. He added that it's equally important to remember where all those accounts are if you don't roll them over when you leave a company.

Debbie hopes she won't have to empty her 401k, and plans to start contributing again from a new job soon. "That's why it's so good, when you do have a job, to invest when you can."

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