This is a guest post from Dawn of Frugal for Life. If you like what you see here, please consider subscribing to her RSS feed.
I’ve twice been given the opportunity to rollover my 401(k) instead of cashing it out, and I’ve twice failed to do so. In both cases, I mistakenly placed today’s concerns ahead of those of tomorrow.
Cashing out my 401(k)
The first time I cashed out my 401(k), I had accumulated a little over $5,000 before taxes and penalties. If I recall correctly, I used that money to pay off debt and buy a new washer and dryer.
Unfortunately, I didn’t hold back enough to cover my state and federal taxes, so I had trouble paying my taxes when they came due and had to set up a payment plan. This left a sour taste in my mouth, and I vowed never to make that mistake again.
The second time I cashed out my 401(k), I had accumulated a little over $2000, and once again felt that debt reduction was more important than the long-term goal of retirement. This time around I tried to hold back more for taxes, but once again fell short. Once again, I had to set up payments to the IRS to pay what I owed.
With a new job and a fresh outlook, my 401(k) has once again started to grow. Moreover, I no longer review my retirement money as an expensive savings account. I’ve learned from my past mistakes, and now consider my 401(k) to be untouchable, off-limits until I retire.
Looking back, I estimate that I’d have over $10k in an IRA if I had just rolled my 401(k) money instead of withdrawing it. Instead, I have a washer and dryer that are not aging well and a few debts that were paid off, but have since grown back.
When the time comes for me to move from this company to another, I will not hesitate to roll my 401(k) into an IRA. When I do this, it will happen electronically so I don’t ever see a check. Unfortunately, I’m just now learning this at 36 years of age, but starting over now is better than never starting at all.
My experiences have taught me the following:
- Retirement savings, no matter how meager, do add up
- Never pass up matching contributions from your employer
- Always check the fees associated with your investments
- Be an active participant, and move your money if necessary
I also try to imagine myself at 67 as I’m putting the money away.
Hopefully you’ll learn from these mistakes instead of making them yourself.