Home  >  Financial Articles and Q&A  >  I am currently looking for a job. I found out from a...

I am currently looking for a job. I found out from a recruiter that many companies no longer pay relocation. I have $20K vested in 401k at my recent employer. If I need to use this money or part of it, do I cash it out?

The 401k at the potential employer is rated 78 and the salary will be high enough that I can rebuild quickly. We have zero debt except for a car loan. In the past, I had to cash out a 401k and paid the penalty but I wonder if there is a better method. Thank you

Apr 26, 2013 by Ronald from Macomb, IL in  |  Flag
4 Answers  |  5 Followers
Follow Question
2 votes
Rich Winer Level 20

Cashing out a 401K and paying the taxes and penalties is never a great idea. I would do it only as a last resort and try to work relocations costs into your new job package. Also consider other options such as a line of credit, home equity loan, perhaps a loan from your 401K. But try to maintain it. While you may be able to rebuild it and make up the $20K, it you cash it in and pay the taxes and penalty, you will lose the opportunity to have that money continue to grow tax-deferred.

Comment   |  Flag   |  Apr 26, 2013 from Woodland Hills, CA

1|600 characters needed characters left
2 votes

Ronald, This is a tough decision certainly but I might suggest that you measure this decision in time, not money or your ability to rebuild. How long did it take you to get your 401(k) up to $20,000? One year? Two? Three? THAT is how you should measure it. If you cash out your 401(k), you might as well just flush those years down the toilet. Sure, you can rebuild - but by the time you get to $20,000, there will be that nagging knowledge (that you'll try to ignore or forget or somehow otherwise justify away) that your 401(k) would have been $50,000 or $60,000 had you not made that decision.

In fact... just for a mental exercise... that previous 401(k) you cashed out? What would it be worth now... given the market's average annual return of about 14.5% over the last 4 years? Would it have doubled by now? Probably. And now you are thinking of compounding that same mistake again. This is why so many people reach retirement age with nothing to show for it... high INCOMES while they are working, to be sure (which go away at retirement), but no real MONEY. Unfortunately, in retirement, where health care and long-term care and home repairs are a reality - MONEY is what counts.

The fact of the matter is that lump sum compounding works far faster than dollar-cost-averaging compounding. You can never, ever, (and I do mean EVER) catch up by trying to rebuild.

My advice is to find another way. Perhaps you can borrow money to relocate, and interest rates are quite low. You can deduct unreimbursed relocation expenses on your taxes. As a last resort, if you had to, you could even roll your 401(k) to the new one, and then borrow from the new 401(k) (making payments AND paying interest to yourself) to pay off the temporary loan. I see that as a sub-optimal plan, but it would work in a pinch.

You cannot, however, borrow for your retirement. I have yet to see a "Retirement Loan." And I doubt I will.

I am reminded of the scene in the movie "Armageddon" where our heroes have been shot into space to save the planet. They are about to "slingshot" around the moon and subject their bodies to insane, crushing G-forces. The shuttle commander looks back and them and says "OK Men - this is that we've trained for - NOW SUCK IT UP!"

Well... a lot of life is about sucking it up. But those who can suck it up... do better than those who cannot. My advice... cut back... eat soup beans for a while... do without cable TV if you have to... but SUCK IT UP. Don't raid your 401(k). This is not an emergency. It is a challenge. An inconvenience. But NOT an emergency.

Good luck with your move.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Apr 26, 2013 from Jacksonville, FL

1|600 characters needed characters left
1 vote

Hi Ronald! I have to agree with my colleagues here. If you continue to use your 401(k) account - which should be long-term savings - to fund short term needs, you have a bigger issue which is a goal funding mismatch. This leads me to believe that you may not have an emergency fund sufficient for your needs. The better method that you are looking for is to first save 3 to 6 months worth of salary to cover life events such as this, then you will not need to raid your retirement. If you have to dip into these emergency funds, save up again.

You did state that you are looking for a job, but I'm not sure if you have been out of work for a while or not. That may change your situation if you have already depleted your emergency fund.

Also, just because many companies don't offer a relocation package, doesn't mean that they all work that way. If your skill set is in demand, you should work with your recruiter to negotiate this into your hiring package. If you skill set is not in demand, then you may want to rethink why you are moving when the company could hire anyone locally to fill the position. There are certainly other personal reasons for moving, such as education and being closer to family, but be sure the move is for the right reasons. Good luck to you and your family!

Comment   |  Flag   |  Apr 26, 2013 from River Hills, SC

1|600 characters needed characters left
0 votes

Cashing out a 401(k) should be an absolute last resort. You have to pay tax on the money you withdraw plus a 10% penalty. If you have to do it, then you have to do it, but I would not encourage you.

If your money is in a 401(k) the employer will withhold at least 20% for income tax. If you have to do this and you have the time, roll it in to an IRA. You will still have to pay the tax and penalty at tax time, but you won’t have to get 20% withheld.

Comment   |  Flag   |  May 06, 2013 from Delray Beach, FL

1|600 characters needed characters left