Any option is better than cashing out your 401(k)

The lack of finan­cial edu­ca­tion and con­fi­dence leads to some real­ly ugly deci­sion mak­ing. A Seattle Times arti­cle caught my atten­tion “3 bet­ter options than cash­ing out 401(k) when chang­ing jobs” because I could think of like 100 bet­ter options. Including stick­ing pins in my eye­balls.

It’s real­ly sim­ple. The IRS levies a pret­ty stiff penal­ty for ear­ly with­draw­al from a 401(k) and you have to pay tax­es on the mon­ey with­drawn too. While the sav­ings oppor­tu­ni­ties are great, espe­cial­ly if your com­pa­ny match­es your con­tri­bu­tions, if you pay a penal­ty to the IRS you throw much, if not all of those ben­e­fits away.

Don’t do that.

It’s so hard to get ahead, to get an advan­tage when build­ing wealth. 401(k)‘s are a great way to accel­er­ate your wealth build­ing. Why spend all that time build­ing, only to throw it away… when it’s com­plete­ly unnec­es­sary to do so.

So what should you do?

The arti­cle gives you the full set of options (there are 3) — you can keep it with your cur­rent employ­er’s plan, move it to your new employ­er’s plan, or roll it into an IRA.

There are three rea­sons I’d roll over into an IRA:

1. While 401(k) plans are great vehi­cles for accel­er­at­ing the amount you have saved, they’re less great when it comes to invest­ing options. They’re good for accel­er­at­ing sav­ings because you can save more pre-tax earn­ings than you could by invest­ing in an IRA direct­ly, and you are often award­ed match­ing dol­lars. However, 401(k)‘s usu­al­ly lim­it your invest­ment choic­es to a small set of mutu­al funds. The only way to “un-lim­it” those choic­es is to roll your 401(k) over into an IRA.
2. I also like the roll-over option because you can choose the bro­ker­age you want to work with, it does­n’t have to be the one your employ­er has cho­sen. It’s good to build your own rela­tion­ships, why let your com­pa­ny get the ben­e­fits of the rela­tion­ship? I have my IRA, along with my reg­u­lar non-retire­ment account and my bank account all at the same bro­ker­age as a result of rolling over. It’s eas­i­er for me, and I have a good rela­tion­ship with the bank (Fidelity) as a result.
3. Thirdly and self­ish­ly, if you roll-over your 401(k) into an IRA you can cre­ate your own Elephant’s Paycheck Blueprint and set your­self up with anoth­er pay­check while hav­ing fun invest­ing. (Cool, right?)

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