Cashing Out Your 401(k)? Think Again

When you finally bid your job adios and prepare to sail off into the world of retirement, you'll face an important decision: what to do with your 401(k) account. A CFPB study revealed that one in three workers who leave their jobs while in their 50s choose to cash out their 401(k) accounts, but that decision can create huge financial problems both immediately and in the future.

During your 50s is a terrible time to take money out of your 401(k) account, thanks to the early withdrawal penalty. If you remove money from a tax-deferred retirement account before age 59 1/2, the IRS will slap a 10% penalty on the withdrawal, payable when you file your federal income taxes for the year. For example, if you had $200,000 in your 401(k) account and you pulled it all out when you quit your job, if you're younger than 59 1/2, you'll owe the IRS $20,000 in penalties. That's a pretty high price to pay for not waiting just a few years longer to access your money. Not to mention the income taxes you'll also owe on the withdrawal (see the next section for more on this).

There is one exception to the early withdrawal penalty: if you leave the employer sponsoring your 401(k) for any reason and you're 55 or older, you can take money from your 401(k) without penalty during that year. You'll still owe income taxes, though.

Source: Fool.com