Recently, I met a young couple who wanted to take $35,000 out of a retirement account to buy a “want” rather and a “need.” The money was in a profit-sharing plan one of them received working for a local franchise. Because none of the money invested in the profit-sharing plan was contributed directed by the employee, they felt it was like “free money.” In other words, it didn’t really feel like theirs.
Looking at the balance in the profit-sharing plan every month started to create tension for the young couple. As long as the employee worked for the company, they were not allowed to touch the funds; however, once they quit to pursue another employment opportunity, the money was theirs to do with whatever they wished.
Thoughts of “We could pay off bills with this money!” or “There’s enough money there to buy a brand new car!” began swirling through their heads. When they came in for advice on how to cash in, I suggested they roll the profit-sharing plan into a Traditional IRA and leave it there instead. I then illustrated to them the reason for my advice.
In their tax bracket (15% for federal taxes and 6.9% for state tax), they will have to remove $51,395 to cover taxes and the 10% early withdrawal penalty. At a 10% assumed rate of return over the next 35 years, this early withdraw will cost them over $1.44 million in retirement! Neither one of them came from a family with lots of wealth, and I pointed out that by leaving their retirement account alone and invested appropriately, they will be the first ones in either of their families to be millionaires.
When they came in, they were thinking like slaves, but I encouraged them to think like “free” people who understand how money works. Before you consider cashing out your “pot of gold” in your employer-provided retirement plan, I strongly consider you use this calculator on our website to determine what you are giving up in retirement in the future by cashing out your retirement plan today.
Sometimes the most dangerous thief of our future financial security is our current impatient self.