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I just switched jobs and have over $100,000 saved in my workplace retirement account. I’d like to take the money out to pay bills, do home repairs, and buy gifts. My new job pays well, so I’m not too worried. — Isabela, 40
When you work and contribute to a 401(k), that money is taken from your paycheck before taxes and grows tax-deferred. Many employers also add matching contributions. That makes it an effective way to build retirement savings.
Isabela’s contributions and her employer’s match added up over 10 years. She put in $377 a month and her employer added $200 a month. At a 7% annual return, her $45,000 in contributions became about $100,000 after a decade.
Because she’s only 40, cashing out now would trigger income taxes on the full amount plus a 10% early withdrawal penalty. On $100,000, that penalty alone would be about $10,000. More importantly, cashing out ends the benefit of tax-deferred compounding. If she leaves the money in the old 401(k) or rolls it directly into a self-directed IRA and it continues earning 7% a year, that $100,000 could grow to roughly $386,000 by age 60 — and that’s without adding another dollar.
Don’t cash out your 401(k). With a new, higher paycheck, use that income to cover expenses and pay down debt instead. You can’t recover the lost years of compound growth. Even if you start a new 401(k) today, it will take years to rebuild the same balance, and you’ll be closer to retirement before you get there.
The smarter options are to leave the funds in your former employer’s plan or do a direct rollover into an IRA. A trustee-to-trustee transfer moves your money without triggering taxes or penalties and keeps it growing tax-deferred. You may also be able to contribute to the IRA if you qualify.
Rolling over is usually straightforward. Pick a discount brokerage and open an IRA (many people use firms like Charles Schwab, Fidelity, or TD Ameritrade). Contact the 401(k) administrator and ask how to complete a trustee-to-trustee transfer. You’ll provide the IRA account details on a form; in many cases the plan sells investments and transfers cash to the new account. The whole process can take less than a week.
Once the funds are in an IRA, you can reinvest them however you like. A diversified mix of low-cost index funds aligned with your asset allocation is a sensible approach. (If you want a quick primer, see resources like the free ebook 20 Minute Guide to Investing.)
There are several advantages to rolling over to an IRA: lower fees at many brokers, full control over investment choices, and continued tax-deferred growth. An IRA is a powerful tool for building long-term wealth.
If you’re still unsure about what to do, consult a financial professional for personalized advice.
