updated 4/26/2006 1:03:47 PM ET 2006-04-26T17:03:47

Securities regulators are warning people that cashing out even a small amount of their 401(k) investment accounts can have a potentially serious impact on their retirement savings.

The National Association of Securities Dealers, the brokerage industry's self-policing organization, issued an investor alert Wednesday regarding the short- and long-term consequences of withdrawing money from 401(k) plans before the investor turns 59 1/2.

The NASD cited a recent study showing that 45 percent of employees cash out their 401(k) plans when they change jobs. It is better to leave the money in the former employer's plan, roll it over to the new employer's plan if possible or transfer it into an Individual Retirement Account, the group says.

Investors may be better off borrowing from their 401(k) accounts _ often at relatively low interest rates _ rather than cashing out, it says.

If an employee cashes out of their 401(k) plan and the money isn't transferred to the new employer's plan or to an IRA within 60 days, the current employer is required by law to withhold 20 percent of the employee's 401(k) account balance for paying federal taxes.

Federal, state and local income taxes are due on the entire amount withdrawn. A 10 percent early-withdrawal penalty also may be charged.

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