Don't Cash Out Your 401k!
This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.
Q: I am so worried about my 401(k) retirement account. I am planning to retire in three years and the value continues to drop. Should I cash out my 401k now in order to avoid further losses?
A: There are two reasons why selling right now is not in your best interest.
Taxes = Ouch!
First, if you are under 59 ½ years old, you are going to owe penalties and also pay Uncle Sam a lot of taxes. You would take a bigger hit from cashing out than any further drop in the stock market would affect your portfolio.
Joe is right, cashing out your 401k prematurely will incur a 10% penalty plus ordinary income tax. For the average working couple, that stands to be a 25% hit. Ouch!
Longer The Better
Secondly, you need to think long term, even if you are close to retirement. If you are healthy, you will probably live for 25 or 30 more years. Selling when the market is down will lock in your losses and therefore limit the size of the nest egg you will need to carry you through the next three decades. […]
