Although some people who move retirement
assets out of a
401(k) plan
choose a cash distribution, many advisers
argue strongly against it. A cash distribution might seem useful
in the short term, but in the long term, it could have a major
impact on your retirement savings.
Even taking what seems like a modest amount
out of your long-term retirement assets could make a big difference
in the long run, since a few thousand dollars invested continuously
in a
tax-deferred account has the potential to grow substantially. Plus, there is
usually a 10% penalty on top of the taxes that are due for taking
cash out of a tax-deferred retirement account before you've reached
age 59 1/2.
Your best move is probably to keep your retirement
assets invested in a tax-deferred account, avoid the taxes and
penalties of a cash distribution, and prepare to start contributing
again as soon as you can.
Taking a cash distribution can be quite expensive. First, those distributions are taxed as income. Your employer's plan is required to withhold 20% of the distribution for federal income taxes, so the check you receive is for the value of your account minus 20%. However, you may owe more tax than is withheld, depending on your tax rate.
You'll also need to pay state and local taxes, which won't be withheld by your employer. If you're in one of the higher tax brackets and live in a high-tax state, these charges could total almost half the value of your 401(k) assets.
