What does cashing out a $15k 401(k) cost?

Leaving a job puts four options in front of the balance: leave it where it is, roll it into the new employer's plan, roll it into an IRA, or take the cash. The first three cost nothing in tax. The fourth costs about $5,850 on $15,000, before counting what the money would have become.

There are two separate charges and they are often confused. The distribution is ORDINARY INCOME, so it stacks on top of your salary and is taxed at the rate your last dollar reaches, and on a $140,000 salary a $15,000 distribution stays inside your current bracket. Separately, a 10% early-withdrawal penalty applies before 59 and a half. The penalty is not a tax rate and it is not deductible: it is $1,500 off the top regardless of what bracket you are in.

The withholding confuses people, and it is worth separating from the cost. A plan must withhold 20% federal on a cash distribution. That is a PREPAYMENT of the tax above, not an additional charge, and if your actual bill is higher you owe the difference in April. On these numbers the true federal cost is about $3,600, so the 20% withheld is not enough and leaves a balance due.

The larger cost is the one with no line item. $15,000 left invested for 30 years at 3.9% after inflation becomes about $47,042 in today's money. That is the real comparison: not $9,150 against $15,000, but $9,150 today against $47,042 of spending power later. Small balances are cashed out most often precisely because they look too small to bother rolling over, and they are the ones with the longest time left to compound.

What to do instead, and none of it is difficult. A direct rollover to an IRA or the new plan is not a taxable event and has no limit. If you need the money, check whether your situation matches one of the penalty exceptions first: separation from service in or after the year you turn 55 removes the penalty on the plan you just left, and there are exceptions for disability, certain medical costs and a few others. Those exceptions remove the 10%, never the income tax.

One trap worth naming. An INDIRECT rollover, where the plan sends you a cheque and you redeposit it within 60 days, is taxable if you miss the deadline, and the 20% withholding means you must make up that fifth from your own pocket to roll the full amount. A DIRECT transfer between institutions avoids both problems and is the default worth asking for.