Leaving a Job? Here's Why Cashing Out Your Retirement Savings Is Bad, According to Suze Orman

You shouldn't just take the money and run.

One of the biggest benefits of working for a company (as opposed to being a freelancer) is getting access to a workplace retirement plan, like a 401(k). Many employers offer workers free matching dollars for those plans, making it easier to build wealth for retirement.

Meanwhile, a lot of people are leaving their jobs these days to seek out better opportunities elsewhere. For some, it's a matter of boosting their earnings. For others, it's a matter of wanting to do more meaningful work, or enjoy more flexibility, like the option to work remotely.

If you're joining in the Great Resignation, you may be eager to pursue a job at a new company. And given the number of available jobs these days, it's a good time to look.

But if you're going to leave a job behind, be very careful in how you treat your 401(k) dollars. If you cash out that account, you could end up facing some pretty costly consequences.

Don't cash out your 401(k)

Financial expert Suze Orman knows that workers are resigning in droves these days. But if you're leaving your job and taking a 401(k) with you, Orman insists that cashing it out is a big mistake, as she recently discussed on Twitter.

The money you have in a 401(k) gets to enjoy tax-advantaged treatment. As such, there are strict rules involved. 

If you cash out a 401(k) before age 59 1/2 (or age 55, in some cases), you could face a 10% early withdrawal penalty on the sum you remove. So if your 401(k) balance is $20,000 at the time you leave your job, and you cash it out, you could lose $2,000 of that off the bat.

Plus, assuming your money is in a traditional 401(k), cashing out will also mean having to pay taxes on that money. Now your exact tax hit there will hinge on the tax rate you're subject to. But you could easily end up losing 20% of your money or more to the IRS. 

Not only that, but if you cash out your 401(k), you could end up short on retirement savings down the line. And that's not a good thing.

A better option

If you're leaving a job that sponsored your 401(k), you may have the option to keep your money where it is. And if you have another job lined up that has a 401(k), you may be able to just roll your money from your old plan into a new one.

If not, a good bet is to roll the funds from your 401(k) into an IRA. The beauty of IRAs is that they're not dependent on an employer. If you're self-employed, or if you'll be working for a company that does not offer a retirement plan, you can open an IRA on your own and save for your senior years in that account.

Plus, if you roll your 401(k) funds directly into an IRA, you won't have to worry about facing penalties. You also won't be charged taxes, since you're not taking any money out -- you're just housing it in a different place.

The idea of moving to a new job may be tempting these days, especially if you're less than satisfied with your current employer. But don't make the mistake of cashing out your 401(k). Doing so could backfire on you -- and cause you a world of regret.