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
Cashing out a 401(k) before age 59½ is the one move that triggers a 10% early-withdrawal penalty—on top of regular income taxes. Take John, 45, with $150,000: cash it out and he owes income tax plus a $15,000 penalty, so that balance can shrink by tens of thousands almost overnight.
| What John does with his $150,000 | 10% penalty? | What happens |
|---|---|---|
| Roll it into an IRA | No | The smoothest option—keeps growing tax-deferred, with more control over how it’s invested |
| Leave it in his old employer’s plan | No | Penalty-free, but often limited choices and higher fees—and easy to lose track of |
| Cash it out for income | Yes | Income tax + 10% penalty—the costly mistake |
| Move it to his new employer’s 401(k) | No | Works if the plan allows it, but usually less flexible than an IRA |
Cashing out is the one move that drains your future. Every other option keeps your money working for you.
Not sure what to do with an old 401(k)? The 401(k) rollover course walks through your options.
