Question:
❓John, age 45, leaves his job and has $150,000 in his 401(k). Which choice would trigger an extra 10% penalty—on top of regular taxes?
A) Rolling it over into an IRA
B) Leaving it in his old employer’s plan
C) Cashing it out for immediate income
D) Moving it into his new employer’s 401(k)
Answer:
✅ C) Cashing it out for immediate income
Here’s why:
A) Rolling it over into an IRA — The smoothest option. Your money keeps growing tax-deferred, no penalties, and you usually get more control and flexibility over how it’s invested.
B) Leaving it in his old employer’s plan — Penalty-free, but not ideal. You’ll often be stuck with limited investment choices, higher fees, and you lose track if you switch jobs again.
C) Cashing it out for immediate income — The costly mistake. At 45, John would owe regular income taxes plusa 10% early withdrawal penalty. That $150,000 could shrink by tens of thousands right away.
D) Moving it into his new employer’s 401(k) — This can work, but only if the new employer allows it. It locks your money back into a workplace plan, which often means less flexibility than an IRA. Sometimes it’s fine, but it’s not always the best fit.
The bottom line? Cashing out is what drains your future. Every other option keeps your money working for you—the question is which one gives you the most control.
