Posted on 02/27/2009 6:57:02 PM PST by Washi
I know that there are several knowledgeable people on this board, so I'm coming to you with a decision that I've been wrestling with for weeks.
Conventional wisdom dictates that, unless absolutely necessary, you should leave your 401K/IRA alone. In normal times, I understand the reasons why that is wise, and agree whole-heartedly.
But does that apply to our current economic environment?
I have an IRA and a 401K. The IRA is in an index 500 account (closely tied to the S&P) and I have not paid anything into it for over 10 years. I still pay enough into the 401K to receive maximum matching from my employer.
I have lost 40% of the IRA value in the last few months. If I cashed it out now, taking into account a 10% penalty and 20% taxes, I would be left with enough to completely pay down my credit card debt and auto loan.
If the S&P drops to 300 (as I've heard it may from some sources), my IRA will be worth squat, and I will still have the credit card/auto debt.
My question is: Is it more important, in an economy like the one we are in now (or worse), to pay down the debt, or to remain in the market and hope it doesn't completely bottom out?
bookmark to watch
Heck I lost everything except a few pair of jeans and my laptop. Owe the Fed’s a bunch and don’t know where the line is drawn to either pay the Taxes and starve or not pay them and eat.
Go with your gut, is all anyone can do. No one really knows what the future holds, but it doesn’t look good. How tenable is your situation, personally, as far as continuing to service your personal debt?
Is the peace of mind, of owning your vehicle outright and having no credit card debt, going to outweigh potential regret, if things turn out to be not quite so dire as they appear to be, from our present vantage point?
How far from retirement are you, and do you anticipate being able to recover sufficiently in that time, to fund retirement? Many people have resigned themselves to the idea of working until they die. Would you be able to deal with such a circumstance, if it comes to that?
Then, you have the high liklihood that taxation will not be at all favorable, for your IRA and 401k, when the time to draw arrives. There have been hints that such accounts may be seized as well.
It’s a problem many of us are having to wrestle with.
If you are of the mindset. The plan from the top these days seems to be inclined towards taking your 401k. I would personally bet on it.
Why not reallocate your investments into bond funds ?? Treasury inflation protected funds that pay a low intereest rate plus an inflation rider. At least you make some money ? Why not a small portion into a gold fund ?
David Dreman suggests it may be a good time to invest in a banking index fund. (Newsmax.com) Great fund manager by the way.
Last June I put everything I had in the “Stable Market Fund” in my 401K. I actually have made 1.9% over the year. However, I am out of work and in school. I may need the money soon. I am thinking of cashing out the whole amount. I can’t put anymore in. I don’t think anything’s going to make money over the next couple of years.
You can move money around INSIDE your IRA and 401K — i.e. you can change between mutual funds ( sometimes limited number, but there are always more than one), INCLUDING money market fund. So you don’t have to take it OUT of your IRA or 401K and have to pay the taxes and penalties. Call your IRA custodian and your 401K administrators and find out about all the options INSIDE those accounts.
All that said, it’s hard to say, NOBODY, but nobody knows whether at this point it still makes sense or not to take money out of the market. While things are looking grim, but you don’t know when the market turns up and if and when it does, it may jump up a lot — or not.
A major question is your age — you don’t need to post it here, but if you are say in your thirties, then this may be an opportunity to put more money into those funds, because one would expect that in 20-30 yeaars the market will be much higher. If you are older, but you don’t need that money really soon, you may still leave it alone, and as you put new money into it, again, in 10-20 years it will be worth more, unless Obama will take it all away — first the income from “the rich”, than the wealth, etc.
Teh main point is the first paragraph, that you can move money around inside your IRA or 401K, if you wish, but at this point, think carefully, you already lost about half of it.
Or in your IRA where the last time you put money into ten years ago, you lost your gains, but you are probably right back where you started, i.e. you didn’t actually lost the money you put in initially.
This is not advice, merely information and suggestion that you get more info from your IRA and 401K cutodians.
One more thing regarding your debt — as long as you can pay it and don’t have to default, I would say to not take out your IRA and 401K, because by doing that you lose a lot more, with the taxes, penalties and including not being able to recover the money you lost in the market. This loss is much more, than the interest you are paying on your loan, probably many years of interest you are paying.
Having a cushion, however shrunk, for emergencies is much more important, than having no debt, but no money for emergencies.
Good questions Washi. Look forward to reading some of the responses.
I was old enough to take a withdrawal and did just that
in November to pay off my debts. I sure feels good to
have done that, as I watch the balance go down everyday
with the market. I moved 90% of it to Bonds last Feb. and
that saved me from tremendous loss. I see more and more
talk about the govt just taking over 401Ks anyway, so at
least I got something worthwile out of mine while I could.
If there’s any left by the time I retire (few months) it’s
going to get rolled into IRA and then we’ll see.
Washi, you’re the first ever here to spell ‘advice’ correctly in the thread title. Congratulations!
What if he takes a loan against his 401k, to pay down debt? I’d go for the car if the limit for such a loan isn’t sufficient to pay it all off, mobility is necessary for continued employment.
He’d be paying himself back, with interest, which would lock in a rate of return, protect his principal so long as he is able to repay, and the only real consequence of “defaulting” would be a tax bill on the amount not repaid.
Sounds like it’s potentially a way to kill two birds with one stone, so to speak.
Ha ha. Thanks cat. Is there some sort of prize for that?
Thank you all for your advice so far. I haven't made a decision yet, but I'm sure all of the points you bring up will help me decide.
A 401k loan would still be debt. I believe that the interest rate for such a loan would be 10%. I pay less interest on my auto loan and for my credit card. I looked into taking out a 401k loan to pay down the debt, then rolling my IRA into the 401k to repay the loan (avoiding the penalty and taxes) but that is not legal/allowed. You can't pay back a 401k loan with untaxed money.
Bad idea.
I wish the eternal optimists John Templeton and Uncle Lou (Rukeyser) were still around. I bet they’d both advise you to sit tight. I can say, don’t sell at the bottom (which is one reason why we have the bottom - the sellers outnumber the buyers.)
One of mutual fund studies I read a few years ago discovered,, not surprisingly, that one year’s bottom performers were among the top performers the following year (excluding such perennial losers as the Steadman Funds, of course.)
bump
You’d be getting rid of interest paid to a third party, and converting that to a higher rate of interest paid to yourself. I don’t see it as being as consequential as pulling it all out to pay down debt. Unless you have to default, that is. Even then, the consequence is no worse than what would be experienced from pulling it all out, unless I’m overlooking something.
That is true. If, heaven forbid, I lose my job though, doesn't the 401k loan come due immediately?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.