Should I roll over my current 401(k) to my new employer’s plan, or cash it out, pay off my debts, and start a new 401(k) from scratch?

I am almost 40 and moving to a new company. Would it be better in the long run to roll over my current 401(k) to the new employer’s plan or cash it out, pay off everything, and be debt free after taxes and fees, then start a new 401(k) from scratch?

This question has many variables: how your money is invested, your overall debt situation, your credit score, and future earnings potential, among other things.

As a general rule, you rarely come out ahead when cashing out a retirement fund when younger than 59 ½. If the 401(k) is a traditional 401(k), meaning not a Roth 401(k), then you will pay federal income tax, plus a 10 percent penalty, plus possibly state and local income tax.

If you have serious credit card or other debt problems that are causing you other financial issues, then cashing out could be beneficial in rare circumstances.

Since a precise answer varies so much from person to person, I recommend that you seek the assistance of a financial adviser to analyze the optimum choice for your particular needs.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Paul K. Rudoy, CPA, PFS, is managing partner of H2R CPA in Pittsburgh.