MIAMI (TheStreet) -- If you are changing jobs, one of the many big decisions you will face is what to do with your pension plan. You may be tempted to take the money and run. Bad choice!

Taking the money and spending it is not a smart choice. The most important reason: You shouldn't be systematically looting your retirement account. Keeping the money growing in a tax-deferred environment until you actually need it for retirement is an enormous benefit. The IRS gives you this huge advantage in the hopes we won't have to support you on welfare tomorrow.

When you're changing jobs, you'll be tempted to cash out your pension plan, maybe for a splurge. Don't.

Just in case you didn't get the hint, the IRS has devised some pretty draconian treatments for those withdrawing funds before normal retirement age. They really don't want you to finance your next car or vacation with your pension distribution.

For starters, if you are younger than 59.5, the pension will be required to withhold 20% to cover part of the enormous tax you are going to owe. But it gets worse: Because you are paying tax on the distribution at ordinary income tax rates, you may have a tax rate of up to 39% on the entire distribution. So at the end of the year you may very well have a severe tax deficit and penalty if you didn't properly withhold on your quarterly filings. Unless you fall under one of the exemptions for death, disability, etc., you may be penalized an additional 10% for early withdrawal. And, of course, if you live in a state with income tax, the state may further deplete your remaining balance.

Let's look at an example to see just how bad this might be. Sally, 30, is an attorney, has a pension balance of $50,000 and just got an offer at a competing firm with a huge raise. She thinks it might be neat to show up driving a new red Miata. Here is how that would work out:

Total Distribution:


Less 20% withholding:


Net check to Sally:


Additional taxes due (33% rate):


Penalty tax of 10%:


Net proceeds:


Almost half of Sally's distribution evaporated. It's gone off to the IRS, never to be seen again.

The real problem in these transactions is that Sally has impoverished herself in her old age. Employees who withdraw their pension funds are destroying their own retirement benefits. Had she left the proceeds at work earning even 9% in a tax-deferred account, by the time she turns 60 the balance would be $663,384. At 65, the balance should be $1,020,698, and she could comfortably withdraw $60,000 a year forever. Pretty expensive little red car!

Instead of buying a little red Miata, Sally might be considering reinvesting the net proceeds to grow for retirement. It's unlikely she could ever make up for the loss of capital she incurs by paying the taxes so many years in advance. Deferral is a powerful wealth accumulation technique. Keeping all those dollars at work in a tax-deferred environment is a huge advantage not easily matched.

Resist the temptation to blow the money. Taking the money is not an option you should consider.

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Frank Armstrong III is the founder and principal of

Investor Solutions

, a Miami-based NAPFA fee-only registered investment adviser with more than $500 million of assets under management. He holds a B.A. in economics from the University of Virginia, has more than 38 years' experience in the securities and financial services industry and has published four books and hundreds of articles on investments and retirement planning. Contact him at