Thinking of cashing out your 401k?

A new study released by Hewitt Associates says that 46% of workers that lost their job last year cashed out of their 401k.  That's a clear sign of uneducated investors.  Understandably there are hardships that require drastic measures, but this study indicates that nearly half of workers cashed out and the significance is perhaps that employees view the 401k more as a severance package than a retirement savings vehicle.

Here's a great article by personal finance columnist Eileen Ambrose that discusses the pitfalls and consequences of cashing out your 401(k) account.

Try to avoid cashing out your 401(k) account

Instead of cashing out, consider rolling your 401k over to an IRA in a tax-free trustee to trustee transfer and converting it to a Roth IRA so that all future earnings will be tax free.  Big words right?  They don't have to be and a financial advisor will help you fill out the paperwork and do the transfer.  Charles Schwab, Fidelity, Vanguard and T Rowe Price all offer good 401k/IRA rollover programs but if you want some independent advice consider a fee-only financial advisor that is a member of NAPFA, the National Association of Personal Financial Advisors.

Keep in mind, a 401k is not a personal savings account and shouldn't be treated like one.  Even a small balance of $5,000 will double in 10 years if it earns 8% a year and if left in a 401k no tax will be due on until you withdrawal the money in retirement.

Tom Taylor, CPA is a fee-only, independent Financial Planner and Certified Public Accountant and can be contacted at Chesapeake Financial Advisors or Taylor & Company in Towson, MD.  He is a member of NAPFA and the MACPA and AICPA.