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Should I Raid the 401(k) to Buy “Safe” Assets?

by Ryan Guina

Last week I wrote an article about leaving your money in your retirement accounts instead of withdrawing it because of the economic crisis or other reasons. This reader question is one of many similar e-mails I have received asking if it is a good idea to withdraw retirement savings. It was easier to answer the questions by writing a full length article instead of recreating the wheel each time.

This read also had a different element to his question, so I will publish it, along with responses from the M-Network.

The question:

Hi Ryan, I have 2 questions:

What if the government decides to follow FDR even further and simply takes our savings to apply towards their debt (war or other social debts)?

Also, what if the government takes our retirement money and invests it in social security? The option has been brought up by more than one person in congress.

Does it then make sense to remove your money now? I am 34 and had over $170K last year, now I am around $60K I am thinking of buying gold/silver and land to live on if it keeps getting worse. What are your thoughts on those two points?

Scott

Hello, Scott, thanks for contacting us. To be honest, I don’t think there is a big likelihood of the US government confiscating citizens’ money for governmental use or anything else. If the government were to resort to that, it would probably mean that the government as we know it no longer exists and we as a nation and as people are probably facing bigger worries than our life savings.

Regarding your retirement funds, it sucks, I know. My 401k lost a lot of money as well and I hate watching it drop. Even so, I would recommend leaving your money in retirement accounts, otherwise you are going to take a huge hit on early withdrawal penalties and taxes. Early withdrawal penalties will hit you with an immediate 10% penalty on the amount you withdraw, and you will also have to pay taxes immediately upon withdrawal. Depending on your tax bracket, you could easily lose between 30-40% of your retirement funds immediately upon withdrawal. You will also lock in current losses. At least when you leave your money in retirement accounts it has a chance to increase in value.

If you are interested in investing in gold or silver as a hedge against US currency devaluation or any other reason, then I would recommend looking into a precious metals fund or other method of investing in your desired assets while keeping our money in your retirement accounts, so as to avoid penalties and fees. Keeping your funds in your retirement account may also ease the tax bite, as gold is taxed at a higher rate than many other investments.

Here is what other M-Network members have to say about your question:

Mrs. Micah from Finance Freelance Life:

No and no.

Gold & silver are only worth money if people think they are… same as stocks, etc. They have no inherent value; their value depends on demand, so it’d be no different than investing in the stock market (which you can do inside or outside a 401(k). If you do your research and decide that it’s a solid investment, then you can do so, but it’s no different than any other investment.

Land — Have you ever heard of eminent domain? It allows the government to repossess your land. They’re generally supposed to offer money for it, but they can take it anyway if you don’t agree. It can be done for civic purposes or as a way of “stimulating” the local economy… Suppose that a large corporation wants to move next to your land and they want your land for a parking lot. The government can take your land if they determine it is better used as a parking lot. Land is not safe from the government either. So if your big concern is that the government might take your money, land isn’t going to protect you.

The only cases I can think of where a government took its citizens’ savings, etc, were generally during communist revolutions (not talking Canada, talking Russia/Cuba/China) and they took everything. In those cases, neither precious metals and land were exempt. Modern-day socialist governments don’t go after savings or possessions.

The threat is SO unlikely that you’re much more likely to hurt yourself very badly by taking a big loss and getting hit with early-withdrawal penalties. Those penalties are a guaranteed loss of savings. The alternatives you’re considering aren’t “safe” from the government either, whether in day-to-day life (eminent domain) or in revolution.

Plonkee from Plonkee.com:

What if the (US) government really does those things? Why do you think that will mean that they won’t also come after your land and your gold?

Mrs. Micah is right that generally major confiscation of money implies a some sort of wholesale change in government. And normally land goes as well – the economic mess in Zimbabwe started with redistributing land, so investing in land doesn’t necessarily mean that you are safe. And I don’t think that you would be able to protect it by force from a government with one of the largest armies in the world.

Investing in land is not a bad idea necessarily. Investing in gold or silver are not bad ideas necessarily. Taking a massive tax penalty is usually a bad idea. Safest place to invest is probably in improving your own skills – your ability to make an income for yourself no matter what the government does is your biggest asset.

Scott, I hope these ideas help you form your decisions on what to do with your retirement funds. If you need more information, I recommend speaking with a professional financial planner. Best of luck to you!


Published or updated January 19, 2012.
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{ 8 comments… read them below or add one }

1 fredct

Amen. You can’t act like the world is about to collapse. If that happens, you’ll have bigger problems that your 401(k) balance… like finding dinner in a garbage bin so your family can eat tonight.

The government has no right to seize your money, regardless of what some may pontificate, and doing so would have to be the side effects of a wholesale revolution… the odds of which are 0.00000000000001%, and that’s probably an overestimate.

People need to chill out and realize that while the economy is bad, its been bad before, and it will recover.

You need to make sure your investments are appropriate for you and your situation- not all in stocks if you’re nearing retirement. But also realize that precious metals, CDs, savings accounts, and even a box under your mattress have their own kinds of risks.

If you have a while until retirement (10+ years) now will likely turn out to be a terrific time to buy equities at depressed prices. We’re recently seen about 20% gains in less than a month.

And while I’ve no doubt prices will continue to be volatile (perhaps for years, heck if I know), once the chicken little’s stop yelling about the sky falling, you’ll be glad you stuck it out (again, if you have the time to do so).

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2 Curious Cat Investing Blog

Leaving money in retirement plans is by far the smartest move. Tax rates will likely have to increase in the future to pay for all the consumption we have been doing without paying for it the last few decades. But potential increases in taxation is actually a reason to put more money in tax advantaged retirement accounts, not less.

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3 Mrs. Micah

@fredct

That’s how I look at it. If there’s such a dramatic revolution that the government is taking our savings, then we’ll probably have a lot more to worry about, like people in Zimbabwe. The odds of such a revolution are incredibly low–but even if it happened, it seems that humans can survive (and sometimes) thrive in extraordinarily bad situations.

(Ryan, would you mind fixing a few typos in my answer? My brain must have been going faster than my fingers when I wrote it. Or asynchronously.)

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4 DDFD at DivorcedDadFrugalDad

The proverbial house has burned down– too late for the “insurance”.

What’s done is done– forget the past and start rebuilding . . . markets go both ways.

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5 Jenna

One thing I noticed while poking around the web and reading far to many blogs to mention. No matter what we do to cut cost in our homes no matter what we do for a living , we all must be creatures of habit or something because the number of blogs that keep the running debt toll that have right around $20K debt or just over or just under it is scary to say the least, like some how this is America’s magical number for debt. How can that be when some folks have both adult couple members working and other folks have like four or 8 kids? Some have trimmed budgets so far they are now even having two nights per week no electric to cut that bill and save more towards debt. Others are willing to eat popcorn for a month if that is what it takes to find some money to throw at the credit cards. I find it more than wierd that so many folks are all around the $20K number no matter how far apart they all are on living habits or even areas of the county. What is it about this number??????????

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6 Ryan

Jenna: I don’t have an answer for you, Jenna. From what I have noticed, most personal finance bloggers are fairly young. Do it’s probably just a coincidence, or because many people who blog are probably in a similar stage of life and have a little college debt or a few student loans remaining.

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7 Mike

Mrs.Micah and the others are wrong.
The government has a history of confiscating people’s money.
In fact it has happened six times in the history of the USA.
The last two were the gold confiscation executive order, whereupon
citizens were required to turn in their gold, after which it was doubled in
value and the citizens were paid with the new fiat currency which was
promptly cut in half by the gold doubling – a double whammy.

The most previous was the decoupling of the dollar from gold at Bretton Woods.
Since then, the dollar has been systematically debased.
Therefore, you’re money has been confiscated completely in front of your face.

Try this: Put $100 into a desk drawer. Go back to it in 10 years. See what
it’s worth now. That is confiscation of your wealth and not one man in a
thousand is smart enough to figure it out.

YES, your 401k will be confiscated and converted into a GRA when the
sovereign debt crisis hits the USA. Debt will consume GDP by 2015.
It’s hard to grasp, but it’s game over time.

Will saving gold help you? I don’t know, because it’s all going to be completely
unpredictable.

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8 barbara

I’m interested in doing the same thing,except my land has rental property. I am 61 now and worried about having a job this time next year. Wouldn’t having rental property with an income be better than letting it just sit?

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