Spend Now, Pay Later, Planners Caution

The issue does not come up a lot in his practice, he says, since most clients roll over their money into either an IRA or the new company's plan. Golden says this is where an advisor can serve as an alter ego, guiding the worker in a rollover decision.

Even someone in the 20s will be losing a lot of compounding, concurs Michael Garry, a certified financial planner with Yardley Wealth Management, Newtown, Pa. "Time slips away and then you are in your 30s with a family and a mortgage," he notes. So, "it is bad no matter how small an account," he says.

"It is frightening to think that you are losing a third to 40% of your 401(k) to taxes," Garry says. If a highly paid worker decides to take a distribution, then the marginal rate paid could be higher than in retirement, he adds. "It would be hard to know what would be a better use of that money now, unless it was a dire situation."

While the cash-outs are probably from workers who have been at an employer only a short time and who therefore have only a small amount in their accounts, John Ritter, a certified financial planner with Ritter Daniher Financial Advisory, Cincinnati, Ohio, says, "Any time there is a chance for a tax-deferred dollar, I hate to see it wasted."

Between 35% and 40% of that money is "walking away between the penalty and income tax paid," he continues. Even those without an advisor can roll it into a no-load fund family, Ritter adds.

As a general rule, it is not an issue that comes up with clients, according to Doug Taylor, a certified financial planner with Taylor Wealth Management, Torrance, Calif. In rollover situations, he says he generally recommends that the people roll the funds into an IRA, because this offers more flexibility in investment choices. However, if the client is in a profession that is vulnerable to liability suits, Taylor adds, he would recommend keeping the money in a 401(k) because of the plan's ERISA protections against creditors.

Above all, Taylor says that he would not recommend cashing in the money, because "they would never recover from the tax hit if there is an early distribution."

Kevin Brosious, a certified financial planner with Wealth Management, Allentown, Pa., says the matter hasn't come up with clients, but if it did he would recommend against it. Those who are taking cash instead of rolling over assets probably do not have advisors, he conjectures. With the possibility of a tax bill as high as 40%, "they are eating their seed corn" today at the expense of tomorrow, he says.