Don't do it!
The days agone when our grandparents worked over 40 years with a company and received pensions through their employers, nowadays it is the norm to hear the average American holds a job for 5-10 years. So the question is "what to do with all those old 401k's lying around?"
An article published by the Wall Street Journal states that about 30-40% of Americans cash out their 401k's. Here is why you do not want to do this and the price you pay when you cash out.
Cashing out your 401K is a very bad idea
Although it's tempting when you leave a company to take advantage of your accounts you should consider rolling them over, here are a couple of important vital things you need to know:
Uncle Sam hits you hard
Most people don't realize this but if you cash out your 401k's right off the bat Uncle Sam will hit you with a 10% penalty, but that is just the beginning of your punishment for receiving a distribution.
Let us say you have a 401K from a previous employer worth about $20,000; you decide to cash it out. You will be hit up front with a 20% combined taxes and penalty fees.
So instead of receiving a check for your 401k of $20,000, you will only receive around $15,000 if your lucky and will not have gained any growth for your retirement.
The best move for your old 401k's
If you are not in a good situation and you desperately need this distribution then by all means take care of your necessities.
There are also situations you can take advantage of here are a couple of scenarios that can help you when you have to withdraw money from your accounts, in these cases, you will only have to pay taxes and you won't be penalized:
Scenario 1. First time home buying
Scenario 2. Paying for education for you or family members
Scenario 3. You can withdraw to help solve unreimbursed medical expenses and health insurance.
Most people don't know about these circumstances and never know that this is a possibility or an option. I would recommend before you do this to talk with a trusted tax representative.
The Cost of Cashing out
The reality doesn't set in until years later when it is realized but when you decide to cash out you give up the opportunity for your money to grow at exponential levels, you basically zero out your account and leave nothing for growth. On the other hand, if you left it in the account what a difference a couple thousand can turn into after 25/50 years with about an estimated 8% growth you could have realized double-digit or even triple-digit growth at a modest rate.
It is hard to see your account 25/50 years from now but to give you an idea of how one of our most popular indexes have grown historically take the S&P 500 this index has realized an average total return of about 9.8% over the past 90 years. If you don't like the numbers I have stated here contact me today and I can show you some of our products I have that are highly respected and are showing an average of 8-9% growth rates given the current situations in our economy.
The bottom line here
The conversations I hear every once in a while from clients or people who seek out advice when they face this crossroad sometimes when its too late and they have proceeded with the motions to close their 401K's as a result you end up robbing yourself of your future retirement. There are strategic alternatives the are available to you to help you optimize your money for a stronger financial future for you and your family.
Rene Gonzales
c. 512-568-7203
e. Rene.Gonzales@primerica.com
www.primerica.com/ReneGonzales
