3. Cashing Out When You Change Jobs
When you leave a job, it is tempting to cash out your 401(k), especially if the balance seems small. This is often the single most destructive financial decision a worker can make.
If you cash out:
- You pay taxes: The entire amount is taxed as ordinary income.
- You pay a penalty: If you are under age 59½, the IRS hits you with a 10% early withdrawal penalty.
- You kill the compound interest: You reset the clock on that money’s growth.
A $10,000 cash-out by a 30-year-old doesn’t just cost them the $3,000 or so in taxes and penalties today; it costs them the roughly $100,000 that money would have grown to become by age 65.
Action Step: When changing jobs, always roll your 401(k) over into your new employer’s plan or a private IRA. This keeps the tax shelter intact.
