Withdraw Funds from a 401K?

February 6, 2009

With the current economic crisis on everyone’s mind, you may be wondering if you should withdraw money from your 401K. My recommendation is that you do not. Rather your contributions should continue based on the “buy low-sell high” theory.

What does this mean for you? Simply stated, right now most individuals may have incurred a severe loss in their 401K plans. But, considering that the stock market has dropped approximately 40% since the economic decline, your portfolio will likely increase with stocks, bonds, and mutual funds that can now be purchased at lower prices. See my article on Continuing Contributions to a 401K.

If you withdraw funds from your 401K, the cumulative effect will result in your taking a double loss. First, by paying a penalty for early withdrawal – and second, by decreasing the amount of purchasing power you would have as a result of the stocks tumbling to their lowest rates.

You may withdraw funds from your 401K at age 59½ penalty free. If you withdraw beforehand, however, you will incur a 10% penalty and pay tax on the amount distributed.

If you are really in a bind you should withdraw funds from your taxable accounts before you withdraw funds from your 401K.

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