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Leave Your Money in Your Retirement Accounts!

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Over the last few months, the economic crisis and mortgage crisis have caused many people to lose large percentages of their retirement and investment portfolios. Losses of 40% or more are not uncommon. While this is devastating to those who are near retirement and is discouraging for everyone else, that doesn’t mean it all is lost.

Should I withdraw the money in my retirement accounts? I have received numerous questions from people asking if they should cash out their 401(k)s, IRAs, or other retirement plans. In most cases, the answer is a resounding, no. By withdrawing your money from your retirement accounts now, all you will serve to do is lock in your losses and possibly subject yourself to taxes and early withdrawal penalties. For most people, the best course of action is to leave your money in your retirement accounts.

Why you should leave your money in  your 401k plan, IRAs, or other tax deferred investments

1. Avoid early withdrawal penalties and taxes. Early withdrawal penalties will eat your lunch.  Before withdrawing your money from your 401k or IRA, you should keep in mind that you could pay early withdrawal penalties of 10% of your withdrawals and you may also be subject to taxes. Taxes and penalties could easily erase another 30% of your investment, on top of the 40% or so you have already lost.

2. Avoid locking in losses. At this point you haven’t actually lost any money – just the value of the shares. Selling your shares locks in the loss and turns a paper loss into a real loss.

3. Give yourself a chance to earn your money back. There is a good chance that the value of the shares in your retirement portfolio will increase in value, though it might take some time. Withdrawing your money removes any chances of recapturing the value of your investments.

4. Avoid handicapping your retirement. Withdrawing from your retirement accounts now means you will need to start saving for retirement again from scratch. Withdrawing your retirement savings, paying penalties and taxes, and locking in your losses will severely hamper your retirement plans.

What should you do with your retirement accounts?

At this point, the best thing you can do is stick to your retirement savings and investment plans. Continue contributing to your retirement accounts, make sure your asset allocation is set at your desired level, and don’t withdraw your retirement savings. The lower prices on the stock market means now may be a good time to invest and you may decide increasing your retirement account contributions is a good idea.

If the current markets make you nervous, consider investing in lower risk assets such as cash, money market accounts, bonds, and other low risk investments. This will keep your money in the tax deferred investment, prevent early withdrawal penalties and taxes, and give you the psychological advantage of not watching the value of your retirement accounts continually drop.


Published or updated October 6, 2009.
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{ 12 comments… read them below or add one }

1 the weakonomist

Good, sound advice. Listen to the man and everyone else out there that says to stay in the market. If you pull out of your retirement accounts now, you are throwing away hundreds of thousands of dollars in potential returns.

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2 Neal Frankle

I agree. Retirement money is the longest term money any of us have. Therefore, it has the longest term to recover.

Pulling money out of retirement accounts is the worst possible course of action.

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3 Curious Cat Investing Blog

I agree people should keep their money in their retirement account. If anything add more. If you are decades away from retirement I would not advise moving into more conservative investments at this time (you will then lock in losses, even if you leave them in your retirement account). Still that is a better option than withdrawing the money. If you are closer to retirement and were too aggressively positioned then moving some into cash may make sense.

Even better, add more to your retirement account.

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4 Abigail

I couldn’t agree more! Everyone is completely freaking out about the value of their retirement accounts. I think most people need to remember how much time is left to have things recover. Even people close to retirement, since they’re not going to take it all out at once (hopefully).

I’d be interested to hear you weigh in on Funny About Money’s post “Is it time to punt?” I really think it’s not a good move, but I think she’s already made up her mind.

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5 MoneyEnergy

Very thoughtful post, there…. alot of people need to hear this.
I’m in my early thirties, and there’s no way I’m touching any of my paper losses. I’m not even worried about it. People who have kept their holdings have even already seen them bounce back up from the lowest November and February lows. So just hang on…. and, for the future, remember that this is why dividend stocks can help ease out these bumps in the road.

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6 Benjamin

I rode the stock market down being 100% invested in foreign and American mutual stock funds, and I intend to ride the market back up!

There is less risk in stocks now than there was a year ago, there is a lot more “value” in this market!

That being said, I almost sounds like a cliche’ to say that “stocks can’t go much lower” lol!

Anyway, I still believe that long term, stocks are the way to go! I few more days like yesterday (march 23) and we’ll be right back in the black!

Nice post!

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7 Young Cash Cow

I couldn’t agree more. The key for me is “locking in losses.” People love to say, “I’ve lost so much in my IRA.” But the truth is, you haven’t “lost” anything until you take it out. Once the market rebounds, everyone will be just fine… especially those who invested during the low times (and now it’s still low – so jump in if you haven’t already!).

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8 Kristy @ Master Your Card

Absofreakinglutely! I’ve been telling people at work this and they all look at me like I’ve lost my mind. I don’t understand why people have such a hard time grasping the concept LONG TERM! Getting into the stock market isn’t about making big bucks quick. It’s about staying in for the long haul. I hope investment advisors are still telling people that because it seems to me that too many people are jumping ship, which effectively locks in the losses. Hell, with my 401(k), I upped the money I was contributing and moved to a more aggressive position. Everything is on sale! Plus, I’m 27, so I’ve got lots of time.

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9 DDFD at DivorcedDadFrugalDad

Great advice!

What is done is done. Don’t make it worse. And don’t miss the chance for dome upside to recoup losses– the market always overreacts and there is always a nice gain (usually 12-18 months) following a bead year.

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10 Mark

I took a proactive approach.

I actually kept my money in my retirement fund but sold 50 percent of the shares I held in my stocks/funds just before the “fall” in October 2008. As a result, I managed to preserve my investments to a degree. While I did lose value, it was really just the same amount I “earned” during the last few years bull run.

So in the end, I broke even. Had I kept it all in the funds, I would have lost more. I am still contributing though. The money from the shares I sold is just sitting in a money market earning interest.

I am just waiting for the best time to jump back in. I did use some of it to purchase more shares in the funds that “fell” to lower the average cost per share which actually helped. Should these shares return to their former highs, I would actually increase in value beyond what I had before.

Not sure if this made sense. It is not for everyone. It takes financial understanding of what to do to control your investments. Nice blog, just checked it out for the first time. Love the layout.

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11 Ryan

Hi Mark: Sounds like you’ve done better than most people in the last year! I’ve upped my contributions as well. I think that in the long run, it will do very well for me.

Thanks for the compliments on the site layout. You can read about the recent redesign here: Cash Money Life 2.0.

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12 fahersez

In Malaysia, we contribute about 20% of our wages and salaries to the statutory retirement investment fund. This fuund called the Employee Provident Fund, invests the money and pays us a dividend yearly. (For 2008 it was 4.5%).

THere are restrictions to the withdrawal of the money until we reach retirment age of 55.

Still I think most of us appreciated the fact that we were protected from the tumbling markets effects on the EPF.

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