Dana Point, CA
Cash out
If you have the opportunity to take a lump-sum distribution from your retirement plan, you get immediate access to your money. Despite how tempting this can be, "cashing out" could leave you with a very large tax bill and could significantly reduce your retirement funds.
The reason for this is that distributions from qualified plans are subject to income tax and your former employer is required to withhold 20% of your distribution for federal income taxes. You may also be subject to additional federal, state, and local taxes in the year the distribution is received. A 10% federal tax penalty typically applies if the distribution is taken before age 59 ½ (or 55 if separated from service). All of the taxes you pay will reduce the amount you actually receive.
