Should You Take Money Out of 401K With the Market Being So Volatile?
When the market goes down, your 401k may do the same. Despite a 401k's advantages -- tax-free contributions, tax-free growth, and with many plans, added contributions from your employer -- it may be tempting to shift money out of the plan into cash, real estate, gold or whatever else seems stable. This may prove a mistake, so think carefully before deciding.
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Expenses
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Withdrawing money from your 401k and reinvesting it can be expensive. Once you take money out, it becomes taxable income. If you're younger than 59 1/2, the Internal Revenue Service will consider that a premature withdrawal and hit you with a 10 percent tax penalty on the amount you withdrew. If you're shifting the money to a brokerage or investment account elsewhere, you may also have new fees and costs to pay as well.
Volatility
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The stock market has always been a roller-coaster, sometimes up, sometimes down. If you try to shift your investments to keep up with swings in the market you can easily fall behind and end up worse off, according to Mark Riepe of the Charles Schwab investment firm. As you get closer to retirement, there's a greater risk of market swings depleting your account just when you need the money. One option is to shift to whichever of your 401k investment options offers more stability -- greater bond investments and fewer stocks, for instance.
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Rollovers
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When you leave your job, you may be able to keep your money in your former employer's plan. You can also transfer the money -- a rollover -- to your new employer's savings plan or to a traditional or Roth individual retirement account. If you want greater control over your investments in a volatile market, shifting to an IRA can give you that. If the market is down, that can be a good time to move into a Roth: You have to pay tax on Roth rollovers, so the less your 401k is worth at the time, the less the tax.
Rebalancing
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Even if you started out with a mix of bonds and stocks that you like -- 40 percent bonds, 60 percent stocks, for instance -- the performance of the two categories may have unbalanced them, so that the amount invested in stocks is no longer what you want. Riepe recommends you check your account regularly and make adjustments if the mix is too volatile for your taste. Ultimately you're the best judge of how much risk you can live with.
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