Retirement is probably the biggest expense that most people will ever have to pay for during their lifetime.  If your employer offers a 401(k) plan, it is a great way to begin saving for retirement.  A 401(k) allows a worker to save for retirement, and have the savings invested, while deferring current income taxes on the saved money and the earnings until withdrawal.  Some employers will even make a matching contribution.  If your employer offers a 401(k), look into the employer’s matching contribution; this could be a windfall for you if there is a match, which is like getting “free money.”

  Today, with a record number of people unemployed, many people are searching for additional funds.  The current economic environment is causing many people to struggle financially to the point where they are willing to cash out of their retirement plan.  This may seem like a good idea for someone who is strapped for cash, but down the road the consequences can be very severe.  A 25 year old, cashing out $5,000 today, may be sacrificing around $75,000 at retirement, assuming a 7% return until age 65.  Before cashing out, check with your personnel department to see if your company’s 401(k) has a loan provision, some plans do, and some do not.

A recent study by Hewitt Associates, surveyed 170,000 401(k) participants, who lost, or changed jobs in 2008.  It showed that 46% of workers with 401(k) plans, who switched or lost jobs, cashed in their plans.  Around 60% of people cashing out their plans, were younger employees who were in their 20’s.  Of those in their 50’s, only around 33%, cashed out their plan.

    Cashing out of your retirement plan, prematurely, is usually never a good idea.  I would suggest you roll over your 401(k) into an IRA.  There is no tax consequence, and you are still keeping your retirement funds intact.  The money that you have begun to set aside for retirement, should not be used for current financial situations.  If you really need the available funds, try cashing out a little from your personal retirement plan, or personal savings, instead of your 401(k).  You should consult your financial advisor before you withdraw any funds from your retirement plan, remember in addition to everything else, you may end up paying a substantial penalty on an early withdrawal.