Brian J. O'Connor

The very essence of a retirement nest egg lies in the concept of patient growth and compounding of investments over time. Its purpose is to offer a bountiful reserve of funds when one bids farewell to the workforce, ensuring a comfortable retirement. However, a disconcerting trend has emerged, as a significant portion of younger workers succumb to the temptation of prematurely shattering their nest eggs.

The result is a tax bill, fines for early withdrawals, lost contributions and a diminished - or vanished - account balance likely to come up short at retirement time. We'll discuss the details.

A financial advisor can help you organize your retirement savings and make sure you are set up to meet your financial goals.

Workers Are Cashing Out Their 401(k) When Leaving Their Jobs There are a number of financial problems with such a move. One of which is because contributions are tax-deferred, the withdrawals are treated as ordinary income, subject to the worker's marginal tax rate.

In addition, the internal revenue service (IRS) takes a second cut, adding a 10% penalty for withdrawals made before age 59.5 (although there is an exception available to workers 55 and older).

Other Financial Consequences
Workers may also sacrifice some of their 401(k) employer's match if their
account isn't totally vested, which can take as long as four years. In addition,
the worker loses out on the valuable long-term compounding for all of that
untaxed money.

And workers who take loans against their 401(k) balances must repay the entire balance before the next federal tax filing deadline. If workers don't repay the balance before then, the remaining loan balance is treated as a distribution and is treated as taxable income.

Cashing Out Depending On the Balance
There also are situations where employers can choose to cash out your account
when you leave the job, depending on the balance:

Less Than $1,000 Account Balance
The employer can cut you a check. But it won't be for the full amount. The IRS
requires the employer to withhold 20% to cover income taxes.

Between $1,000 And $5,000 Loan Balance
The accounts can be involuntarily rolled over to an individual retirement
account (IRA) in your name.