Why Employees Cash Out 401(k)s…and How it Affects Retirement

Changing jobs is common in today’s workplace. Many Americans will work for several employers throughout their careers, and with each transition comes the decision of what to do with an existing 401(k).

A recent Vanguard study found that nearly one-third of workers cash out their 401(k) when leaving a job. While it may seem like a quick solution, this choice can come with significant drawbacks, both immediately and later in retirement.

What the research shows

According to Vanguard’s research, about 33% of people take a cash distribution when they change jobs. That means instead of leaving the money invested, rolling it into their new employer’s plan, or moving it into an IRA, they withdraw the balance.

The problem is that those dollars don’t just disappear from the retirement account. Instead, they lose the opportunity to keep working toward long-term growth.

The drawbacks of cashing out

Taxes and penalties
If you’re under the age of 59½, cashing out a 401(k) often triggers ordinary income taxes on the withdrawal, plus a 10% early distribution penalty. This can significantly reduce the amount you actually receive.

Lost compounding growth
Beyond the immediate tax hit, the bigger cost is what you miss out on over time. When retirement savings stay invested, they have the chance to compound—earnings generating more earnings year after year. Cashing out interrupts that process.

Alternatives to cashing out

Fortunately, there are options that can help you preserve your retirement savings when leaving a job:

• Rollover to your new employer’s 401(k): If the new plan accepts rollovers, this allows you to keep your savings tax-advantaged and consolidated in one place.
• Rollover to an IRA: Moving funds to an IRA can provide more control and investment choices, especially within a self-directed IRA where you are offered more investment opportunities.
• Leave the account with your previous employer: Depending on the plan, this may be an option. While it may not be as flexible, it often avoids the costs of cashing out.

Why it matters for retirement

Taking money out of a retirement account may not seem like a big deal in the moment. But repeated cash-outs over a career can add up, leaving a much smaller balance at retirement age.
With Americans living longer and relying more on personal savings, preserving every opportunity for growth can make a meaningful difference.

Final thoughts

Cashing out a 401(k) when changing jobs may feel like an easy choice, but it can carry lasting consequences. Exploring alternatives, such as rolling the account into an IRA or a new employer’s plan, can help keep your savings on track.

If you’re facing a job change and aren’t sure what to do with your retirement account, it may help to learn about your rollover options.

Schedule a call with an IRA Counselor to discuss how to keep your savings working toward your retirement goals.