What is a consequence of cashing out your 401(k) upon leaving a job?

Cashing out your 401(k) upon leaving a job can lead to significant disadvantages, particularly concerning penalties and the loss of potential future growth. When you withdraw funds from a 401(k) before reaching the age of 59½, the Internal Revenue Service typically imposes a 10% early withdrawal penalty. Additionally, the funds you cash out are subject to income tax, which can diminish the amount you ultimately receive.

Furthermore, by cashing out, you forfeit the opportunity for those funds to continue growing tax-deferred within the retirement account. This means you not only lose the penalty-free accrued value of your investments but also miss out on the compounding growth they could provide over time if left in the account or rolled over into a new retirement plan. Thus, the consequence of cashing out can significantly undermine your long-term savings goals, making this option less favorable for your financial future.