401(k) Cash Out Cost: What $30,000 at Age 28 Really Costs: the short version

In summary

This is part 2 of 2 of our guide to Vesting, Rollovers, and What Happens to Your Retirement Accounts When You Change Jobs. It picks up where 401(k) Vesting and Rollovers When You Change Jobs leaves off, and it is written to stand on its own: the key ideas are restated where you need them.

A 28-year-old leaves a job with a $30,000 pre-tax 401(k); other income puts them in the 22% bracket, and the $30,000 stays inside it. State tax is left out.

Cash out: income tax $30,000 × 22% = $6,600; additional tax $30,000 × 10% = $3,000; total $9,600. They keep $30,000 − $9,600 = $20,400, or 68%: a $24,000 check after 20% withholding, then $3,600 more due with the return.

Roll over: nothing is taxed now. At the volume’s assumed 7% nominal return, FV = P × (1 + r)^n = $30,000 × 1.07^37 = $30,000 × 12.224 = $366,709 at 65 — about $122,841 in today’s dollars at 3% inflation ($366,709 ÷ 1.03^37 = $366,709 ÷ 2.98523 ≈ $122,841), using the method in 7.1. It is taxed only as withdrawn, at the retirement-year rate. The $9,600 lost to tax on cashing out would by itself have grown to $9,600 × 12.224 = $117,347.

Leakage at job change is concentrated in people, not dollars. In Vanguard’s How America Saves 2026, 13% of participants left their employer in 2025 and became eligible for a distribution. Of those, 28% took a cash lump sum, yet 94% of the assets available for distribution stayed invested, because the people cashing out mostly held small balances; once balances reached $100,000, nine in ten participants preserved them. Participants in their 30s and 40s were the most likely to cash out (31% and 32%), and those in their 20s cashed out 11% of their assets, against 2% for those in their 60s. The 28% was the lowest share in ten years, and 7% of plans had adopted automatic portability, which moves a small balance into the worker’s new employer plan without a decision.

The evidence has limits: it covers Vanguard-administered plans only, and it does not say what the cash was used for. What it does show is that the decision that matters most is made at small balances early in a career, exactly where the compounding cost in the worked example above is largest.

“Always roll everything into an IRA” exists because an IRA offers the widest fund choice and one place for old plans. It assumes the IRA is cheaper, protects as well and costs no options. Each can fail:

Before resigning: if the next vesting step is worth more than the extra pay the new job would earn you in the weeks you would wait (vested gain ÷ weeks of delay × 52 = the raise needed to justify leaving now), wait for it; otherwise go. When you leave, choose in this order:

What it assumes: you have an emergency fund for the gap between jobs (1.4, 11.4), the balance is pre-tax, and the plans’ fees are known. When to ignore it: if you face a lawsuit or possible bankruptcy, keep the money in an ERISA plan for its stronger creditor protection; if the old plan is terminating or merging, follow its notice and deadlines.

Cashing out small balances at each job change. One cash-out looks minor; a career of them is not. A worker in the 22% bracket who cashes out $10,000 at 25, 30 and 35 pays 22% income tax plus the 10% additional tax each time, $3,200 × 3 = $9,600 in all, and keeps $6,800 × 3 = $20,400. Rolled over instead and left at 7% until 65, the three balances would have become $10,000 × (1.07^40 + 1.07^35 + 1.07^30) = $149,745 + $106,766 + $76,123 = $332,633, about $101,971 in today’s dollars at 3% inflation ($332,633 ÷ 1.03^40).

How to avoid it: before your last day, open an IRA (or confirm the new plan accepts roll-ins) and request a direct rollover, so no check is ever paid to you. If you need cash during the gap between jobs, the emergency fund (1.4) and the job-loss playbook (11.4) are cheaper sources than a 32% tax bill.

1. A 40-year-old in the 24% bracket takes a $50,000 401(k) balance as a check, receives $40,000 after withholding and deposits only that $40,000 in an IRA within 60 days. What tax does the shortfall cost?