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?

by Paul K. Rudoy, CPA, PFS | Sep 14, 2018

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.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
Financial FAQs

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.