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Hi all. I've diligently searched previous posts for my answer but I still have questions, specific to my case.

I'm 26. I left a company a year ago, and just recently received communication from the third party administrator of the profit-sharing plan for this company. I have $5,000 vested. I had thought a 401k and a profit sharing plan was synonymous but I might have been wrong all along.

My current company does not have any 401K plan, though tentatively might have one this January.

My questions are:

1. If I choose to cash out, I will get taxed a total of 30%, yes? Meaning I would only get a check for only $3,500?

2. I'm thinking that since the amount is small, I'd be better off cashing out. I can use the funds to pay off some debts and pay off next semester for my college. Would this be prudent judgment or should I instead take the view that any amount is good to get me started on a retirement plan, therefore I should roll the funds over?

Thanks in advance!
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Your taxes will most likely be higher than 30%

I don't know your Federal Tax bracket, so I'll assume the most common 28%.  Soyou've now paid the Feds 28%.  Then there is the matter of State & Local Incoem tax.  State tax averages around 6%, your state may have less or more.  If you live in a large city, then you may have an additional 1 to 1.5% tax. We'll assume you live in a nice town with no city or county incoem tax.
28% Federal + 6% State, now we add the 10% penalty
total 44%
So, of your $5,000 you'll have $2,800 if my math is correct.
 A pure profit sharing plan is just the employer contributing money to the employees,  the employees do not contribute.  A 401k with the profit sharing will allow the employees to save money from their paychecks on a pre-tax basis.  You can lower your taxable income by the amount you choose to save into the plan.
I would keep the money in the plan and only contribute a little until your debts are paid off, then each year that you get a raise, I would increase my contributions to the 401k by 1%.  Lets say you get a 4% raise, take 1% of that and contibute it to the 401k.  Your take home pay still goes up by more than 3%.  Remember that additional 1% you contribute will lower the overall taxes you pay.
Hope this helped.  If not, please follow up.

Bill
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I would keep the money in the plan and only contribute a little until your debts are paid off, then each year that you get a raise, I would increase my contributions to the 401k by 1%. Lets say you get a 4% raise, take 1% of that and contibute it to the 401k. Your take home pay still goes up by more than 3%. Remember that additional 1% you contribute will lower the overall taxes you pay.
Hope this helped. If not, please follow up.

Bill



Thanks Bill for responding. It has helped. Just another thing..

I had left the company a year ago and the letter I received from the third-party plan administrator does not have an option for me to stay in the plan. My options just seem to be cash out or rollover, and from your calculations, it seems to be a no brainer which option I should choose.
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