Why is Cashing Out a 401(k) and Then Going to the IRA in Marysville CA a Bad Idea?

Posted By : Aubrey Mead , on Nov, 2015

 

The 401(k) is in a state of flux. No one is actually sure if the 401(k)s going to stick around for long due to fluctuating needs and its downsizing in the world of small business. Though there are a lot of questions about the 401(k) system, it should be taken with a grain of salt. Some people may take the talk a little too far and decide to cash out their 401(k) when they switch to a new job.

When leaving a job (voluntary or involuntary), workers have a few options with a 401(k). Most people decide to either keep with their current plan or switch to another account. The other employment position may only allow for one of these options, but it isn’t common.

A select few may decide to cash out entirely. That is a very bad idea, especially if they decide not to reinvest it in any way. Some may decide to put it into an IRA in Marysville CA account after cash out. Why is that idea also bad?

Firstly, account holders will need to pay federal and often state taxes on the funds released. Though this is not avoided in full, it is worse with a full cash out. There are withdrawal penalties involved if the account holder is under 60 years old. The withdrawal penalty is usually about 10% of the total. The other problem is that the relinquishment of the full 401(k) may subject some people to bring their tax bracket to the next level. This means that they will now pay even more taxes on the funds they are receiving. It is a double down method that does not work at all.

The best strategy is to roll over the account into a new IRA or 401(k) package. It could also work to cash out the 401(k) entirely and use those funds to build an IRA, but that is a clunky method. People are not looking to build an IRA in Marysville CA from the ground up, especially if they have an active 401(k). It is possible to move those funds into a new account without taking a hit on major penalties.

 

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