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Compound interest - why it is bad to cash out your 401(k) plan:
- · Basically, the earlier you start saving, the more years your money has to earn interest.
- · Leaving your money to grow in a 401(k) plan or some other defined contribution plan lets you take advantage of compound interest – which is extremely important in building your retirement nest egg.
- · Example: a 25-year old individual with a lump-sum distribution of $3,500 from a 401(k) plan will have $95,783 by the age of 67 (age of full Social Security benefits), assuming an 8 percent annual rate of return.
- · If you cash out your 401(k), you will have to pay federal and state taxes on the money you take out, plus a possible 10 percent withdrawal penalty on the money.
- · And more importantly, you lose the opportunity to increase the amount of money you have in a tax-deferred account.
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