"Cashing out" means you take your money out of a tax-deferred retirement savings account. Why would you do that?

• You've got a new job and want to use the money in your former employer's retirement plan to pay off credit cards.
• You've gone from two incomes to one because your spouse was laid off.
• You want to buy a new car or take a vacation.
• You pull out of growth investments because you're tired of losing money in a down market.

Avoid cashing out your savings because you'll generally pay a 10% penalty if you're under age 59½, plus you'll pay taxes on the money you took out. More important, you're giving up continued tax-deferred growth of those savings.

Here are two scenarios:

1. John has an $18,000 balance in his former employer's 401(k) plan. He decides to cash it out and pay off his car. Taxes and the early withdrawal penalty take $7,200 of his $18,000, leaving him with $10,800.
2. Instead, he decides to keep that $18,000 in a 401(k) or put it in a rollover IRA. If John averages a 6% rate of return over 32 years, he'll have $116,161 at retirement.

Your retirement savings should stay invested until you retire.

This information is not intended as tax advice. Investors should consult a tax advisor.