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.|
Total Distribution: $50,000
Less 20% withholding: -$10,000
Net check to Sally: $40,000
Additional taxes due (33% rate): -$6,500
Penalty tax of 10%: -$5,000
Net proceeds: $28,500 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. >To submit a news tip, email: email@example.com.
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