Cashing out the 401(k)
The most cringeworthy topic I hear brought up by new clients is that they plan on "cashing out" of their 401(k), placing the money in their savings account and spending the money as needed. For a financial adviser to hear this is very concerning. If this were to happen, the retiree would realize all of the income that comes with distributing money from a retirement account in one year. This would place them in a very high tax bracket and would force the retiree to pay significantly more in taxes.
The correct approach would be to roll the funds over to a traditional IRA and slowly pull the funds out as needed. This will allow the retiree to be much more tax-efficient and save thousands of dollars along the way.
— Ryan Bayonnet, founder, Hyland Financial Planning